One of the first questions families often ask after receiving a wrongful death settlement is whether they will lose part of it to taxes. The good news is that in most cases, wrongful death settlements are not taxable because they are considered compensation for a personal injury or death. Certain portions may still be taxed by the IRS, such as punitive damages or interest earned on the settlement. This makes it important to understand the difference between taxable and non-taxable damages so families can protect the full value of their recovery. If you have questions about how these rules apply, you should speak with The Clark Law Office about your case to get clear guidance.
Federal IRS Rules on Wrongful Death Settlements
The Internal Revenue Service has clear rules about how wrongful death settlements are treated. Under Section 104(a)(2) of the Internal Revenue Code, money received for a personal injury or death is generally excluded from taxable income. This means that the compensatory portion of a wrongful death settlement is not taxable.
There are a few important exceptions. If the settlement includes punitive damages, those are always taxable because they are meant to punish the defendant rather than compensate the family. In addition, if the settlement money is placed into an account and earns interest, that interest is considered income and must be reported to the IRS.
By understanding how the IRS distinguishes between compensatory damages, punitive damages, and interest, families can better prepare for how their settlement will be treated at tax time.
Michigan Specific Tax Considerations
In Michigan, wrongful death settlements are treated the same way as they are under federal tax law. The state does not impose an additional income tax on compensatory damages related to a wrongful death claim. Families who receive compensation for medical bills, lost income, or the loss of a loved one’s companionship do not have to pay state income tax on those amounts.
One detail that can matter in Michigan is how the settlement is approved through the probate court. During this process, the court may allocate the settlement into specific categories, such as what damages can you recover in a wrongful death claim or medical expenses. While these categories do not create extra taxes at the state level, the way damages are described can still influence how the IRS views the settlement.
This makes it important to have experienced legal representation during settlement approval so that the allocation is clear and protects the family from any unnecessary tax consequences.
Taxable vs Non Taxable Portions of a Settlement
Not every part of a wrongful death settlement is treated the same for tax purposes. Some components are completely excluded from taxable income, while others must be reported. The table below highlights the difference.
📊 Table 1: Tax Treatment of Wrongful Death Settlement Components
| 💰 Settlement Component | ✅ Taxable? | 📌 Explanation |
|---|---|---|
| Compensatory damages such as medical bills, funeral costs, and loss of support | ❌ No | Excluded under IRS Section 104(a)(2). Example: Our firm secured a $4.75M wrongful death settlement in which the entire award was compensatory and therefore non taxable. |
| Punitive damages | ✅ Yes | Always taxable as they are meant to punish the defendant rather than compensate the family. |
| Interest earned on settlement funds | ✅ Yes | Considered income by the IRS and must be reported. |
| Emotional distress tied to injury or death | ❌ No | Exempt if it stems directly from the injury or death. |
| Emotional distress unrelated to injury or death | ✅ Yes | Taxable if not connected to the underlying injury or death. |
💡 Clark Insight: Real Case Result and Tax Implications
In one of our recent wrongful death cases, The Clark Law Office secured a $4.75 million settlement for the family of a truck accident victim. Because the award was entirely compensatory, covering medical bills, lost financial support, and the family’s pain and suffering, none of it was taxable under federal or Michigan law.
If any portion had been categorized as punitive damages or if the funds had been invested and earned interest, those amounts would have been taxable. In this case, however, the family was able to keep the full $4.75 million settlement without any tax consequences.
⚖️ Takeaway: With the right legal guidance, wrongful death settlements can be structured to protect families from unnecessary taxes and maximize the recovery they truly deserve.
Do You Need a Tax Professional?
Even though most wrongful death settlements are not taxable, families can still benefit from guidance beyond the legal process. Large settlements sometimes involve complex financial decisions, and working with a certified public accountant or tax attorney ensures that everything is reported properly.
A tax professional can help families manage settlement funds, plan for long term financial security, and avoid mistakes that could trigger an unexpected tax bill. They can also advise on structured settlements or trusts, which may be useful in cases involving who receives the settlement in a Michigan wrongful death claim or minors with ongoing financial needs.
By combining experienced legal representation with trusted financial advice, families are better protected and can focus on moving forward without worrying about tax complications.
Common Tax Questions About Wrongful Death Settlements
Do beneficiaries have to pay taxes separately on a wrongful death settlement?
No. As long as the damages are compensatory, beneficiaries do not pay separate taxes. Each share that the probate court allocates remains non taxable under both federal and Michigan law.
Are wrongful death settlements always tax free?
Not always. Compensatory damages are tax free, but punitive damages and interest earned on settlement funds are taxable.
What if part of the settlement covers lost wages?
If the lost wages are part of a wrongful death settlement linked to the decedent’s injury or death, they are generally considered compensatory and not taxable.
Can a structured settlement reduce taxes?
Yes. A structured settlement can spread payments over time, which may reduce the risk of interest income being taxed and can provide long term financial security.
Does Michigan tax wrongful death settlements differently from the IRS?
No. Michigan follows the same rules as the IRS. There is no separate state income tax on compensatory wrongful death damages.
👉 Learn more in our complete wrongful death settlements in Michigan hub.