Most parts of a wrongful death settlement are not taxable in South Carolina; however, there are some exceptions.
Bobby Jones Law explains how wrongful death settlements are taxable in South Carolina.
What Is a Wrongful Death Settlement?
A wrongful death settlement is compensation paid to survivors because of a personal injury that results in death. It is a type of personal injury compensation payable to survivors when another party’s wrongful act results in loss of life. A settlement is a resolution to a wrongful death claim that the parties agree to rather than having a trial verdict.
Understanding Federal and State Tax Laws for Wrongful Death Settlements
- The question of whether a wrongful death settlement is taxable depends on whether the government sees the settlement as income. It is a question of whether the funds are income for income tax purposes.
- Generally, wrongful death settlements are not taxable under federal and state tax laws.
- Federal law says that personal injury settlements do not count as taxable income.
- South Carolina law copies federal law when it comes to what counts as income (S.C. Code § 16-6-40(A)(2)(b)).
- There are some exceptions where parts of a personal injury settlement may be taxed. Punitive damages are a common example (report as other income on line 8z of Form 1040, Schedule 1). Settlement interest is generally taxable (report as interest income on line 2b of Form 1040).
- In addition, amounts previously taken as a medical deduction must be reported.
- Funds paid in a survival action may be subject to estate tax. However, South Carolina doesn’t have an estate tax. Federal estate taxes only apply to amounts over $13.99 million in 2025.
Is a Wrongful Death Settlement Taxable in SC?
Most parts of a wrongful death settlement are not taxable, federally or in South Carolina.
Generally, income derived from any source is taxed unless it is excluded. However, IRC § 104 says that funds received because of personal injury do not count as income.
See Kovacs v. Commissioner of Internal Revenue, 100 T.C. 124 (U.S.T.C. 1993) (discussing tax treatment of a wrongful death award; the plaintiffs were awarded almost $1 million in a wrongful death claim).
Are Economic Damages Taxable in South Carolina Wrongful Death Claims?
Economic damages, such as medical bills, funeral expenses, and loss of earnings, are generally not taxed as part of a South Carolina wrongful death claim. These awards pay you back for direct economic losses. Taxing them would prevent you from being made whole.
How Non-Economic Damages Are Treated for Tax Purposes
If they are compensatory, non-economic damages from a wrongful death settlement are not taxed. This means loss of consortium, emotional distress, loss of society, and mental anguish. The IRS says that these losses are the result of a personal injury, and that excludes them from income for personal injury taxes.
What Happens If Punitive Damages Are Included in the Settlement?
If there are punitive damages awarded for wrongful death, the funds are taxed. Only the part paid as punitive damages is taxable. Compensatory amounts are still excluded.
Why?
Punitive damages punish the wrongdoer and deter the conduct of others. Although they are paid to the plaintiff, punitive damages do not compensate the plaintiff for a loss. Therefore, they don’t meet the IRS definition of funds paid because of a personal injury.
The Role of Legal Counsel in Structuring a Settlement
How you structure a wrongful death settlement may influence its tax. Legal counsel can help you favorably structure your settlement. They can guide you through the many things to consider as you proceed with a wrongful death settlement.
How To Maximize Your Settlement While Minimizing Tax Obligations
Ultimately, the goal is to maximize your wrongful death settlement. To do this, you must consider tax treatment and other relevant factors.
Maximizing a settlement begins with proving the right to compensation. You must prove the elements of wrongful death. In addition, you must explain the appropriate award of damages, supporting your case with evidence and arguments.
How you structure an award can impact the amount that is taxed. If you’re looking to minimize taxes, the compensatory award should be maximized as compared to punitive damages. The amount allocated for each category should be clearly stated in settlement documents. However, if the IRS questions the structure of your award, they will look beyond the titles to evaluate the true purpose of the award.
How are wrongful death trial verdicts taxed?
For tax purposes, wrongful death settlements and trial verdicts are treated the same. The tax rules are generally the same. Practically, there may be a difference in a specific case in how a settlement is taxed vs. going to trial because of what the award is designated for. For example, if a jury awards more in punitive damages and less in compensatory damages, the taxes are going to be higher than if more of the award was designated as compensatory.
If you receive a settlement offer, you should weigh the pros and cons of going to trial. The tax treatment of a settlement award is one factor that may weigh in favor of settling. However, it is one factor of many, and your attorney can help you consider your options.
Are workers’ compensation death benefits taxed in South Carolina?
No. Workers’ compensation death benefits are not taxed in South Carolina. However, if you receive a survivor pension or annuity from the deceased person’s employment, those payments may be subject to tax. If the pension or annuity is a U.S. military service benefit, it is likely not subject to tax.
Life insurance, accident, or health policy payments
If you have life insurance or an accident or health policy that pays in the event of wrongful death, and you paid the premiums yourself, it is probably not taxable. If the employer paid the premiums, it may be subject to tax.
Contact an Experienced Wrongful Death Lawyer
If you have a wrongful death claim, how your settlement is taxed is an important question. Call or message Bobby Jones Law.
