Today TaxMama hears from Lenora in Arkansas, who tells us. “Some friends of mine lost their mother due to taking the drug Vioxx® . She died due to complications from taking the drug. Her sons filed suit and are due for a pretty good sum of money. Is that settlement money taxable?”
What a tragic way to lose a parent!
Your question is interesting. But it’s really hard to answer without more details. I suggest that your friend and his family consult with an experienced tax professional before the settlement is issued, when they still have time to negotiate the nature of the money they receive.
There are several issues to research. Here are some of the issues that come to mind:
1) If the settlement were to go to the deceased, since it’s for physical injuries, the settlement would not be taxable. Or at least part of it would not be taxable.
2) Do the same rules apply when the money goes to the sons? I don’t know.
3) Is it better to pay the money to mother’s estate? Or, by avoiding income taxes, will it cause the estate to face estate taxes?
4) Are parts of the settlement taxable? For instance, if there is a loss of income component, or punitive damages, that might be taxable? The wording of the settlement can be important.
It’s well worth investing some money in researching the situation so the final settlement paperwork is worded so the sons end up keeping the most money possible.
Or…your friends could study IRS’s special audit guide on Lawsuits and Settlements.
I hope these suggestions help.
And remember, you can find answers to all kinds of questions about lawsuit settlements and other tax issues, free. Where? Where else? At TaxMama.com.[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the subscribe link and join us.]
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