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Are wrongful death damages taxable?

As the end of the holiday season ushers in tax season, you may be wondering how to account for any and all damages you or a loved one received in a wrongful death judgment in the state of California. The particular circumstances surrounding a case, and personal injury ruling, can play a large role in determining whether or not any resulting damages can be subject to taxation under the law.

The federal Internal Revenue Service explains how compensation received as part of a personal injury settlement or award is regarded under federal tax guidelines. According to amendments made to the 1996 Small Business Job Protection Act, compensation received for physical sickness and/or injurious is generally not considered income, and is therefore exempt from taxation. Consequently, punitive damages, such as those resulting from emotional distress, are typically not exempt from taxation unless they are related to actual out-of-pocket medical expenses.

When discussing the types of wrongful death damages that can be considered taxable, it is important to note the difference between compensatory and punitive damages. While the IRS notes that compensatory damages are often associated with nontaxable damages, the term strictly applies to actual economic losses. And in regards to the taxation of compensatory damages, compensation may only be considered nontaxable if physical illness or injury is a factor. Punitive damages, on the other hand, are generally awarded in conjunction with compensatory damages and account for incidents of wrongdoing. Since punitive damages are often awarded for other losses than financial, they are generally not exempt from taxation.

The taxation of wrongful death damages can be subject to a number of other factors, including California state guidelines. Therefore, the information provided here should not be considered legal advice.

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