Is a Wrongful Death Settlement Taxable in New Jersey?

If your family is receiving a wrongful death settlement, you may be wondering: will any of this money be taxed? It’s a fair—and important—question. The last thing you want is a surprise bill from the IRS or the State of New Jersey after a devastating loss.

The good news: in most cases, wrongful death compensation is not taxable. But there are exceptions, especially when it comes to interest, emotional distress, or survival action claims.

In this guide, we break down what the law says, what parts of a settlement might be taxable, and what you should do to protect your financial recovery.

Understanding the Basics – What the IRS and NJ Law Say

Wrongful Death Settlements Are Generally Tax-Free

As a general rule, both the IRS and the State of New Jersey treat wrongful death settlements as non-taxable income. That means the money you receive for loss of support, funeral expenses, and companionship is not subject to federal or state income tax.

This applies whether the settlement was negotiated privately or awarded by a court judgment. It also applies to lump sum and structured settlements, so long as the compensation is tied to the wrongful death claim.

The Legal Foundation

The key legal protection comes from IRS Code §104(a)(2), which excludes from taxable income any damages received “on account of personal physical injuries or physical sickness.” Since wrongful death arises from physical injury or death, it qualifies for this exclusion.

New Jersey’s Division of Taxation follows the same general rule. As long as the compensation is tied to the wrongful death itself—and not to other claims—the settlement remains tax-free.

That said, certain components of a settlement may still trigger tax obligations. Understanding the difference is critical to protecting your family’s compensation.

What’s Usually Tax-Free in a Wrongful Death Settlement

One of the most common questions families ask is, “Do you pay taxes on wrongful death settlements in New Jersey?” In most cases, the answer is no—especially when the compensation is tied directly to your loss.

Here’s what’s generally not subject to tax under NJ or federal law:

Common Tax-Free Components

• Loss of income and financial support – Compensation for what the deceased would have contributed to the family financially is typically non-taxable.
• Medical expenses – Any compensation covering medical bills resulting from the fatal incident is tax-exempt.
• Funeral and burial costs – These costs are considered reimbursable losses and not taxable income.
• Loss of companionship, care, or parental guidance – Non-economic damages that reflect emotional loss are not taxed under wrongful death law.

Under both IRS guidelines and New Jersey law, these damages are viewed as restitution—not income. You’re being compensated for something that was taken from you, not gaining something new. That’s why these parts of a wrongful death settlement in NJ are usually safe from taxation.

Why These Damages Are Not Treated as “Income”

The IRS and the New Jersey Division of Taxation understand that wrongful death payments aren’t income in the traditional sense. You didn’t earn this money—you’re being repaid for a devastating loss. That’s why wrongful death settlement tax in NJ law carves out clear exemptions for these core types of compensation.

Still, not all parts of a settlement are treated the same. Interest, emotional distress, and survival action claims may be taxable—and knowing the difference could save your family thousands.

What Might Be Taxable in a Wrongful Death Settlement

While most of a wrongful death settlement is tax-free, there are important exceptions. Knowing which parts might be taxable can help you avoid problems with the IRS and ensure your settlement is structured properly.

Interest on the Settlement

If your settlement includes interest—whether awarded by the court or accrued during the case—that portion is generally considered taxable income. For example:

• Pre-judgment interest—compensates for delays in payment
• Post-judgment interest—accumulates between the verdict and final payment

The IRS requires this interest to be reported as income, and it may appear on a Form 1099-INT or 1099-MISC at tax time.

Emotional Distress (in Some Cases)

If emotional distress is claimed separately from physical injury or death—such as in a related legal action—it may be taxable. However, in most wrongful death settlements in New Jersey, emotional distress is tied to the fatal physical injury, making it exempt.

Still, if there’s a separate claim (like negligent infliction of emotional distress), the IRS may treat that differently. It’s important to label and document each claim clearly.

Survival Action Claims

If your case includes a survival action—a claim for the pain and suffering or wages the deceased experienced before death—some of those damages may be taxable. Unlike wrongful death claims, survival action proceeds are paid to the estate and may be subject to estate or income tax depending on how they are classified.

Understand IRS Rules

For official guidance, refer to the IRS Topic No. 503 – Taxable and Nontaxable Income. This resource outlines what parts of legal settlements must be reported on your taxes.

At Rosengard Law Group, we work with your accountant and structure your claim to minimize taxable components and preserve as much of your recovery as possible.

Should You Report the Settlement on Your Tax Return?

Even if most of your wrongful death settlement in NJ is tax-free, you may still have reporting obligations—especially if any portion includes interest or taxable damages. The best course of action? Talk to a qualified tax advisor early in the process.

What to Discuss with Your Accountant

Here are key questions to ask your CPA or financial advisor after receiving your settlement:

• Was any interest included in the payout? If so, how should it be reported?
• Did the case include both a wrongful death claim and a survival action?
• Will the estate need to file a separate tax return for any received amounts?
• Should I expect a 1099 form from the defendant or insurer?

Proper classification and documentation can make all the difference between a tax-free payout and an unexpected IRS notice.

Structuring the Settlement to Minimize Tax Exposure

In some cases, how your settlement is paid can affect the tax outcome. For example:

• Structured settlements (paid over time) may reduce exposure to interest income or large one-time tax hits
• Special needs or family trusts can protect vulnerable beneficiaries and preserve eligibility for public benefits
• Clear legal wording in the settlement agreement can help define which damages are taxable and which are not

At Rosengard Law Group, we work with your accountant or financial planner to ensure your settlement is structured and documented in a way that protects your family—both legally and financially.

How Rosengard Law Group Helps Protect Your Compensation

Wrongful death settlements are about justice—but they’re also about securing your family’s financial future. At Rosengard Law Group, our experienced NJ wrongful death attorneys do more than fight for maximum compensation—we also help ensure you keep more of it by minimizing potential tax exposure from the start.

Strategic Case Structuring

When a case involves both wrongful death and survival action claims, we carefully separate the components so the tax-exempt damages are clearly defined. This helps ensure the IRS and NJ Division of Taxation don’t misclassify your recovery as income.

We work with you—and your accountant—to clearly document:

• Which amounts are tied to wrongful death vs. other legal claims
• What portion (if any) involves interest or taxable income
• How funds are distributed between individuals and the estate

Keeping the Settlement Safe from Unnecessary Taxes

We also help prevent avoidable tax problems by:

• Ensuring the final settlement agreement is worded to protect non-taxable components
• Coordinating with tax and estate planning professionals for large or complex claims
• Advising families on lump sum vs. structured payout options

Your settlement should bring relief—not new financial stress. Let us help you get justice without leaving your family vulnerable to tax mistakes.

Final Thoughts – Know the Rules and Protect Your Future

Your wrongful death settlement is about more than compensation—it’s about securing your future after an unimaginable loss. While most of your recovery is likely tax-free, assuming that every dollar is protected could lead to costly mistakes.

At Rosengard Law Group, we make sure you not only win your case—but walk away with your financial recovery fully protected. We clarify tax risks, coordinate with your accountant, and structure your claim to maximize what stays in your pocket.

Don’t let taxes take more than they should. If you’re pursuing a wrongful death claim in New Jersey, or you’ve already received a settlement and have questions about the tax impact, we’re here to help.

Contact Rosengard Law Group today for a free consultation. We’ll explain your legal and financial options, and help you take the next step—confidently and clearly.

FAQs – Wrongful Death Settlements and Taxes

Do I have to pay taxes on a wrongful death settlement in NJ?

In most cases, no. Compensation for loss of financial support, companionship, funeral expenses, and medical bills is generally tax-free under both federal and New Jersey law. However, interest and survival action claims may be taxed.

Is emotional distress from a wrongful death case taxable?

If the emotional distress is directly tied to the wrongful death itself, it is usually tax-free. But if it’s part of a separate claim (like negligent infliction of emotional distress), it may be considered taxable income depending on how it’s classified.

Do I need to report interest income from my settlement?

Yes. If your wrongful death settlement includes interest—either before or after judgment—that portion must be reported as taxable income on your federal return and may show up on a 1099 form.

What if I received both wrongful death and survival action damages?

Survival action damages (for pain and suffering or lost wages before death) are paid to the estate and may be subject to income or estate tax. It’s important to separate those amounts from your wrongful death claim in the settlement agreement.

Will I get a 1099 from the settlement?

Possibly. You may receive a Form 1099 if your settlement includes taxable portions, such as interest or punitive damages. Always provide this to your accountant and make sure your settlement is clearly categorized to avoid confusion.