Are Wrongful Death Settlements Taxable?

Usually not. Money a family receives because a loved one died from a physical injury is generally left out of federal income under 26 U.S.C. 104(a)(2), whether the case settles or ends in a verdict. Punitive damages and interest are the main taxable exceptions, and a large estate can face estate tax on the survival claim, so the settlement wording matters.

Is a wrongful death settlement taxable income for the family?

Section 104(a)(2) excludes “damages (other than punitive damages)” received “on account of personal physical injuries or physical sickness,” paid by suit or agreement, in a lump sum or in installments. A death caused by a crash, a fall or a medical error is the end result of a physical injury, so the family’s compensatory recovery generally falls inside that rule.

That covers the parts of a wrongful death claim that state law lets the family recover, such as the support the person would have provided, funeral costs, household services and the loss of love and companionship (CACI 3921). The Treasury regulation adds that emotional distress damages tied to a physical injury are excluded too (26 CFR 1.104-1(c)). The IRS frames the test as one question: what was the payment meant to replace (IRS, settlements and judgments)?

The general rules for injury settlements, including emotional distress claims with no physical injury and attorney fees, are on our page about whether personal injury settlements are taxable. This page covers what changes when the injured person has died.

Are punitive damages in a death case taxed?

Yes, in most cases. Publication 525 says punitive damages are taxable even when they relate to a physical injury, and Publication 4345 says they are reported as other income.

Section 104(c) has a narrow wrongful death exception. It applies only where state law, as it stood on September 13, 1995, allowed nothing but punitive damages in a wrongful death action. California, Texas and Washington all let families recover compensatory damages, so the exception does not help here:

• California: the wrongful death claim itself generally cannot include punitive damages (CACI 3921, sources and authority). Punitive damages the person could have recovered can come through the estate’s survival claim (CCP 377.34), and that portion is taxable.
• Texas: when a death is caused by a willful act or gross negligence, exemplary damages may be recovered along with actual damages (CPRC 71.009). Any exemplary portion is taxable.
• Washington: the jury awards the damages that seem just under the circumstances (RCW 4.20.020).

What about interest on a wrongful death judgment?

Interest is taxable even when the damages are not (Publication 4345). Death cases can carry interest for a long time:

• Texas: a judgment in a wrongful death case earns prejudgment interest (Finance Code 304.102).
• California: if the family made a formal settlement offer the defense rejected and the judgment beats it, the judgment bears 10 percent interest from the date of the offer (Civil Code 3291).
• Washington: tort judgments against private parties generally earn interest from entry at two points above the prime rate (RCW 4.56.110).

Example only: a family receives $400,000 for the death plus $30,000 of interest. Under the federal rules above, the $400,000 is generally excluded and the $30,000 is reported as interest income. The actual result depends on the judgment or agreement and each person’s tax situation.

Is the survival claim taxed differently?

A death case often has two claims. The wrongful death claim belongs to family members for their own losses (CCP 377.60; CPRC 71.004; RCW 4.20.020). The survival claim is the person’s own injury claim, which passes to the estate or successor (CCP 377.30; CPRC 71.021; RCW 4.20.046).

Compensatory survival damages for the person’s physical injury, such as medical bills before death, generally get the same income tax exclusion. Two points are different:

• Deducted medical bills. If the person’s medical costs were deducted on the final return and the settlement later repays them, that part can be taxable to the extent the deduction gave a tax benefit (Publication 4345). Publication 559 explains how the estate handles those medical expenses and reimbursements.
• Estate tax. The gross estate includes property the person had an interest in at death (26 U.S.C. 2033), and a survival claim is the estate’s property. A federal estate tax return is generally required only when the gross estate, plus certain lifetime taxable gifts, tops $15,000,000 for 2026 deaths (IRS, estate tax).

Does California, Texas or Washington add a state tax?

• California: the Franchise Tax Board states that California conforms to IRC section 104 as of January 1, 2015 (FTB analysis of AB 2979), so an amount excluded federally is generally excluded on the state return.
• Texas: the Comptroller states that Texas has no state income tax (Texas Comptroller).
• Washington: the Department of Revenue says the state does not currently have an individual income tax (DOR). Washington does have its own estate tax, with an exclusion of $3,076,000 for deaths from January through June 2026 and $3,000,000 for deaths after that (DOR estate tax tables), far below the federal threshold.

What to do now

1. Ask that the settlement agreement state that the payment is for the wrongful death and the physical injuries that caused it.
2. Make sure any punitive or interest amount is listed on its own line, so it can be reported correctly.
3. Find out whether the person’s medical bills were deducted on a final tax return.
4. Keep the agreement, the closing statement and any Form 1099 you receive.
5. If the estate is large or the person lived in Washington, ask the estate’s tax adviser about estate tax before money is distributed.
6. Talk to a lawyer before you sign a release.

Talk to us about your family’s claim

If you lost a family member because of someone else’s carelessness, call Beverly Law at (310) 552-6959 for a free, confidential review in English or Spanish. We also look at how the settlement is worded before you sign. You owe no fees or costs unless we win.

Common questions

Related pages

Personal Injury Questions · Are personal injury settlements taxable? · Wrongful death statute of limitations in California · How are personal injury settlements paid out? · Lawsuit funding on a wrongful death case · Personal injury questions · Law Blog

Important: This page is general information, not legal advice, and reading it does not create an attorney-client relationship with Beverly Law. Laws change and every case is different; talk to a lawyer about your own situation. Attorney advertising. Prior results do not guarantee a similar outcome. You owe no fees or costs unless we win. Texas cases are handled by the firm’s Texas-licensed attorneys, Joyce Ondich and John Efstathiou. Last reviewed: 2026-11-13.