If you are pursuing a wrongful death claim, it’s important to understand how the taxes work on any settlement you receive. A South Carolina wrongful death lawyer can explain taxation of wrongful death settlements during your case evaluation.
Are Wrongful Death Damages Taxable in South Carolina?
Most wrongful death damages are not taxable in South Carolina. According to the Internal Revenue Service (IRS) Rule 26 U.S. Code § 104(a)(2), compensation for a physical injury is not subject to tax. Since a wrongful death is a physical injury, the party receiving payment does not have to pay taxes on the amount.
The only exception is punitive damages, which are taxable.
A wrongful death claim compensates family members for the loss of a loved one when another person is legally responsible for the death. (S.C. Code § 15-51-10). Amounts paid may cover a variety of financial and personal losses, including:
Pain and suffering
Loss of consortium, relationship and companionship
The victim’s medical or hospital bills
Last expenses for funeral and burial
In addition to economic and non-economic losses, punitive damages may be awarded. When it comes to the taxation of wrongful death damages in South Carolina, the distinction between punitive damages and other compensation is very important.
Under South Carolina law, the jury may award the damages that they think result to the beneficiaries on account of the victim’s death. (§ 15-51-40).
IRS Law for Taxing Wrongful Death Damages
26 U.S. Code § 104 is the rule for how personal injury compensation is taxed. § 104(a)(2) states that amounts received on account of personal injury are not included as gross income. There is an exception for punitive damages which are subject to tax.
Although § 104(a)(2) doesn’t explicitly use the phrase “wrongful death,” there is legal guidance for interpreting the law. In Burford v. United States, 642 F. Supp 635 (N.D. Ala. 1986), the court states that it is the position of the IRS that wrongful death damages are for personal injury or sickness, so they don’t count as gross income. The court said that “The exclusion of damages received on account of personal injuries must extend to amounts received for one’s death.” Id., at 637.
There is no distinction between lump sum and periodic payments. Whatever way you receive your wrongful death compensation, it is not subject to tax except for punitive damages.
Taxing punitive damages in wrongful death compensation
Although compensatory damages for wrongful death are not subject to tax in South Carolina, any punitive damages awarded are subject to tax. South Carolina recognizes punitive damages in wrongful death claims. However, punitive damages do not compensate for losses, either economic or non-economic. Instead, they penalize a defendant for willful, wanton or reckless conduct in regard to the plaintiff’s rights. S.C. Code § 15-33-135; Taylor v. Medenica, 324 S.C. 200 (1996). For this reason, punitive damages are subject to tax.
Note: This article is specific to South Carolina. Even though IRS law applies nationwide, because of the differences in state wrongful death laws, taxation may be different in other states.
Steven Krause is a personal injury, auto accident, and workers’ compensation lawyer who practices in Anderson, SC. He graduated form the Thomas M. Cooley School of Law and has been practicing law for 40 years now. Steven Krause believes in fighting for the injured. Learn more about his experience here.