Both Kentucky and the federal government tax income received by Kentucky tax payers. So, what happens when you get money from a wrongful death? Is it taxable?
The simple answer is, all “income” and punitive damages are taxable, all others are not. It’s safe to say that the vast majority of all settlements and trial judgments are not taxable, but that leaves the rest to be taxed.
Compensatory Damages not Taxable
Compensatory damages are those meant to compensate someone directly for their loss. This typically includes things like pain and suffering, mental anguish, loss of consortium, loss of nurturing and training. All of these and other similar damages are not taxable by the IRS or the state of Kentucky.
Compensatory Damages that are Taxable
If any portion of the compensatory damages awarded is considered income, then it is taxable by both the IRS and Kentucky’s income tax. In any wrongful death judgment where loss of income is paid to the survivors, then this is taxable. This is the money that the deceased would have earned for the survivors if he or she hadn’t died.
So, a rule of thumb is, if the money was or would be income when earned by the deceased, then it would be taxable.
Any punitive damages awarded in a wrongful death case are taxed as income because they are not meant to compensate the individual for their loss but to punish the person or company whose negligence led to the death of the loved one.
Punitive damages are to give justice to the survivors because of the at-fault person’s purposeful acts or gross negligence. An example would be if someone purposefully ran into the victim who then died. Or for a company that withheld certain defects of a product to save profits and the victim died as a result.
The IRS specifically mentions that punitive damages are income and are taxable, and the state of Kentucky considers them income and taxable as well.
Kentucky Wrongful Death Attorney.
The death of a loved one is overwhelming and devastating for the family left behind, and the knowledge that the death was the direct result of someone else’s negligent actions can make it that much more painful. If a loved one was killed as a result of someone’s negligence, contact our wrongful death lawyers today for a free consultation.