Taxation is a confusing topic regardless of the situation, but when you receive payment from a wrongful death settlement, it can be difficult to figure out if you owe taxes on it or not. The tax code has never been something easy for the average person to understand. There are always rules and then exceptions to those rules. This is no different when it comes to a wrongful death settlement in Alabama.
The IRS explains the general rule is any settlement you receive that acts as income becomes income for tax purposes. However, a wrongful death settlement falls under compensatory damages for a physical injury, which is not taxable. So, in general, a wrongful death settlement is not taxable.
There is an exception that says any punitive damages you receive, which are damages meant to punish the negligent person, are taxable. However, in Alabama, you may only sue for punitive damages in a wrongful death lawsuit, so the IRS offers an exemption from taxation in this state on punitive damages.
There is also a difference in the handling of money you receive for emotional distress. In general, damages for emotional distress that does not come from a physical injury are taxable. Do note that only the portion of your compensation that is for the emotional distress is taxable. The rest, if otherwise exempt, remains exempt.
There is no denying that the tax laws surrounding damages from a wrongful death lawsuit are confusing and complex. You should be cautious when filing your taxes after receiving a settlement to avoid problems. This information is for education and is not legal advice.