Wrongful Death Settlement Tax Calculator 2026

Under IRC §104(a)(2), compensatory damages received on account of physical injuries or physical sickness are excluded from federal income tax. In wrongful death cases, this exclusion typically covers the core compensatory damages — medical expenses, funeral costs, and lost wages attributable to the decedent's physical injuries. However, not all wrongful death damages are tax-free: punitive damages are always taxable, pre-judgment interest is taxable, and lost wages attributed to purely economic harm (not physical injury) may be taxable depending on allocation.

Yes. Punitive damages are always included in gross income and taxed as ordinary income, regardless of whether the underlying claim involved physical injury. The Supreme Court confirmed this in O'Gilvie v. United States (1996), and Congress codified it in the Taxpayer Relief Act of 1997. This applies even in wrongful death cases where compensatory damages are otherwise tax-free. Effective tax planning often involves negotiating to minimize punitive damage allocation and maximize compensatory allocations.

The deductibility of attorney fees depends on the type of claim. Under IRC §62(a)(20), attorney fees paid in connection with discrimination claims or whistleblower claims are deductible above-the-line (directly reducing AGI). For most personal injury and wrongful death settlements, attorney fees are treated as miscellaneous itemized deductions — effectively non-deductible after the Tax Cuts and Jobs Act of 2017, which eliminated miscellaneous itemized deductions through 2025. For tax years 2026+, the TCJA provisions may not be extended, so consult current law.

Pre-judgment interest is interest that accrues on damages from the date of the injury or death until judgment is entered. Even when the underlying compensatory damages are tax-free, the IRS treats pre-judgment interest as taxable interest income under IRC §61, not as part of the physical injury exclusion. This is because interest represents the time value of money rather than compensation for the injury itself. This rule applies regardless of how the settlement documents characterize the amount.

A structured settlement (IRC §130/§5891) pays damages over time as periodic payments rather than as a lump sum. If the underlying damages qualify for the physical injury exclusion, structured settlement periodic payments also qualify — each payment is tax-free as received. This can provide certainty and a steady tax-free income stream. IRC §5891 imposes a 40% excise tax on "factoring companies" that purchase structured settlement payment rights at a discount, protecting settlement recipients from predatory purchasers.