Are Wrongful Death Settlements Taxable in Louisiana?

When families face the devastating loss of a loved one due to someone else's negligence, pursuing a wrongful death lawsuit becomes an important step toward securing financial stability during an incredibly difficult time. These types of lawsuits are complex, and you may have many questions, such as what tax implications there are on any wrongful death settlement the family might receive. Our experienced Louisiana wrongful death lawyers have the answers.

Is a Wrongful Death Settlement Taxable?

No, most wrongful death settlements are not subject to federal or state income tax. According to IRS Rule 1.104-1, settlement money received in a wrongful death case is typically exempt from taxation because the Internal Revenue Service considers wrongful death compensation as part of a claim stemming from personal injury or physical illness.

This tax exemption exists because wrongful death represents a specific type of personal injury case where the injured party has passed away, making the family members or estate of the deceased the recipients of compensation. Since the federal government treats wrongful death lawsuits as personal injury claims, the same tax-free treatment generally applies to wrongful death settlements.

There are exceptions, some of which are discussed below. As such, you should always seek professional advice from a CPA or tax specialists before accepting any wrongful death or survival settlement or taking any action which could lead to tax liabilities.

Different Types of Damages in Wrongful Death Cases

As every case is unique, there is no average wrongful death settlement, but it's essential to understand how courts and the IRS categorize different types of damages awarded in many wrongful death cases to fully grasp any tax implications.

Compensatory Damages (Usually Non-Taxable)

Compensatory damages represent the majority of most wrongful death settlements and are designed to compensate surviving family members for their actual losses. These typically include:

• Economic damages such as lost wages, lost income, and future earnings that the deceased would have provided.
• Medical expenses incurred before the victim's death.
• Funeral expenses and burial costs.
• Medical bills related to the final illness or injury.
• Lost benefits, including health insurance, pension contributions, and other employment benefits.
• Pain and suffering experienced by the deceased before death.
• Mental anguish and emotional distress damages suffered by surviving family members.
• Loss of companionship and guidance.

The IRS generally does not consider these compensatory damages as taxable income because they aim to restore the family's financial position rather than provide additional income.

Punitive Damages (Usually Taxable)

Punitive damages present a different tax situation. When a wrongful death case involves particularly egregious conduct by the defendant — such as grossly negligent behavior or intentional harm — courts may award punitive damages to punish the wrongdoer and deter similar conduct.

Unlike compensatory damages, punitive damages are typically considered taxable income by the federal government. This means that if your wrongful death lawsuit settlement includes punitive damages, you'll need to pay taxes on that portion of the settlement. The tax rate applied to punitive damages is the same as your regular income tax rate.

Key Exceptions: When Wrongful Death Settlements May Be Taxable

While the majority of wrongful death settlements remain non-taxable, several important exceptions exist that surviving family members should understand.

Previously Deducted Medical Expenses

If you previously claimed itemized deductions on your tax return for medical costs related to your loved one's final illness or injury, any portion of the settlement that reimburses these medical treatment expenses may be taxable. This prevents taxpayers from receiving a double benefit — first as a tax deduction and then as tax-free settlement money.

Interest on Settlement Amounts

Interest earned on wrongful death settlements is taxable. This situation often arises when there are delays in payment, appeals, or when the case takes several years to resolve. Any prejudgment or post-judgment interest that accumulates becomes taxable compensation that must be reported on your tax return.

Emotional Distress Unrelated to Physical Injury

Emotional suffering damages directly related to the physical injuries that caused death are typically non-taxable. In 2023, the Louisiana Supreme Court held for the first time that a plaintiff can seek emotional distress damages that stem from non-physical causes. For example, a plaintiff may file a claim for negligent infliction of emotional distress. Similar to the cases with physical injuries, mental injury damages are not subject to taxation.

Structured Settlements and Tax Advantages

Many families choose to receive their wrongful death compensation through a structured settlement rather than a lump sum payment. Structured settlements offer several tax advantages:

• The entire settlement amount remains tax-free when properly structured.
• Future payments maintain their tax-exempt status.
• Families receive a guaranteed income over time, providing financial security.
• The settlement agreement can be tailored to meet specific family needs.

Working with experienced wrongful death lawyers and financial planners can help determine whether a lump sum payout or structured settlement better serves your family's long-term interests.

Louisiana-Specific Considerations for Wrongful Death Settlements

Louisiana follows federal tax guidelines for these tragic event settlements, meaning the state generally does not impose additional taxes on settlements that are exempt from federal taxation. Louisiana law places no limitation on how wrongful death settlements are distributed between family members, providing flexibility in structuring the financial recovery.

However, Louisiana's wrongful death statute does have specific provisions about who can file a wrongful death claim and what types of damages are available. Under Louisiana Civil Code Article 2315.2, surviving spouses, children, parents, and siblings may be entitled to compensation, depending on the wrongful death circumstances.

Steps to Take After Receiving a Wrongful Death Settlement

When you receive wrongful death settlements, several important steps can help you manage the tax implications:

1. Gather evidence of all medical expenses, funeral costs, and other documented losses.
2. Review previous tax returns to identify any medical expense deductions claimed.
3. Understand the settlement breakdown to distinguish between taxable and non-taxable portions.
4. Consult with a tax professional familiar with personal injury settlements.
5. Maintain detailed records of all settlement-related documents.
6. Consider structured settlement options if appropriate for your situation.

At Rice & Kendig, we guide you through every step of the process, help you file a wrongful death lawsuit, and ensure you are well-informed and supported. We believe our clients are people first, and our commitment is to provide compassionate and comprehensive legal assistance, even after your settlement is finalized.

Let Our Exceptional Wrongful Death Lawyers Fight for Your Family’s Future

Each wrongful death case is unique, and the specific circumstances of your loss, the nature of the defendant's conduct, and how the settlement is structured all influence the final tax treatment. The most important step is seeking qualified legal representation. Contact us to navigate both the legal aspects of your wrongful death claim and the financial planning necessary to protect your family's future.