Federal tax law treats wrongful death settlements differently than other lawsuit awards

Wrongful death settlements in Missouri are generally not taxable as income under federal law, but the rule has important limits. The Internal Revenue Service does not tax the settlement itself if it compensates you for the death of a family member. However, any interest that accrues on the settlement before you receive it is taxable, and certain types of damages within the settlement may be taxed depending on what they cover.

Missouri state income tax follows the same federal rule: the settlement itself is not taxable. But you need to understand what parts of your settlement are covered by this protection and what parts are not, because the breakdown matters when you file taxes.

Key Takeaways

  • The wrongful death settlement payment itself is not taxable under federal or Missouri law, but interest earned on the money before settlement is taxable income.
  • Damages for lost wages or lost earning capacity of the deceased are taxable because they replace income the person would have earned.
  • Medical expenses and funeral costs paid through the settlement are generally not taxable.
  • Your settlement agreement should itemize what each portion covers so you and your tax preparer can correctly report what is and is not taxable.

What parts of a wrongful death settlement are taxable

The taxable portion depends on what the settlement compensates. Pain and suffering damages — money for the emotional harm to surviving family members — are not taxable. Funeral expenses and medical bills the deceased incurred before death are not taxable. Property damage is not taxable.

But lost wages and lost earning capacity are taxable. If the settlement includes money for what the deceased would have earned over their remaining working years, that portion is treated as income replacement and the IRS taxes it. Similarly, if the settlement covers lost benefits the deceased would have received — such as pension payments or health insurance — those are taxable.

The difference comes down to this: damages that replace income are taxed as income. Damages that compensate for injury, death, or emotional harm are not. Your settlement agreement should break down the award by category so you know which parts fall into which bucket.

Interest on the settlement is always taxable

Even though the settlement itself may not be taxable, interest that accrues between the date of injury or death and the date you receive payment is taxable income. This applies whether the interest comes from a structured settlement, a delayed payment, or a court judgment that sits in an account earning returns.

If your settlement agreement specifies an interest amount separately, report that on your tax return as interest income. If the interest is rolled into the total payment without being itemized, ask your attorney or the defendant's insurance company for a statement showing how much of the final payment is interest. You will need that number for your tax return.

Structured settlements and tax treatment

A structured settlement is an agreement to receive the wrongful death award in installments over time rather than in one lump sum. The installment payments themselves are not taxable, but any interest or earnings on the money between payments is taxable.

Structured settlements are sometimes used in wrongful death cases because they can provide steady income to surviving family members over many years. Before you agree to a structured settlement, ask your attorney whether the structure will generate taxable interest and, if so, how much. The tax impact can be significant if the settlement is large or the payout period is long.

How to report wrongful death settlement income on your Missouri tax return

You report taxable portions of a wrongful death settlement on your federal Form 1040 and on the Missouri Form MO-1040. Interest income goes on Schedule B (Form 1040) or the equivalent Missouri schedule. Lost wages or lost earning capacity go on the line for other income, unless your settlement agreement specifies a different treatment.

The defendant or their insurance company should send you a Form 1099 if any portion of the settlement is taxable. However, not all defendants issue a 1099 for wrongful death settlements, so do not assume you will receive one. Keep a copy of your settlement agreement and any correspondence about the breakdown of damages. If you do not receive a 1099 and you believe you should have, contact the defendant's attorney or insurance adjuster and request one.

Work with a tax preparer or accountant who understands settlement taxation. Wrongful death settlements are common enough that most preparers know the rules, but it is worth confirming that yours does before you file.

State tax considerations specific to Missouri

Missouri does not tax wrongful death settlements under state law, following the same federal rule. This means you will not owe Missouri state income tax on the non-taxable portions of your settlement. However, you still owe federal tax on the taxable portions (interest and income replacement damages), and you must report those correctly on both your federal and Missouri returns.

If you received a settlement from a defendant in another state, check whether that state has different tax rules. Some states have their own rules about settlement taxation that may explore depending on where the injury occurred or where the defendant is located. Your attorney can advise on this if it applies to your case.

What to ask your attorney before settlement

Before you finalize a wrongful death settlement, ask your attorney to provide a detailed breakdown of the award by category: funeral expenses, medical bills, pain and suffering, lost wages, lost earning capacity, and any other components. Request that the settlement agreement itself itemize these amounts so there is no ambiguity later.

Ask whether the settlement includes interest or will accrue interest, and if so, how much. Ask whether the defendant will issue a Form 1099 and, if not, whether your attorney can request one on your behalf. These details matter for your tax filing and can save you from owing unexpected tax or filing an incorrect return.

Frequently Asked Questions

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

Not on the settlement itself. The award for the death and related damages is not taxable under Missouri or federal law. However, any interest earned on the money before you receive it is taxable, and any portion of the settlement that replaces lost income (such as lost wages or earning capacity) is taxable.

What if the settlement does not itemize what each part covers?

Ask your attorney to request an itemized breakdown from the defendant or their insurance company before you accept the settlement. If you have already received the settlement without an itemization, contact the defendant's attorney and ask for a written statement of how the award was allocated. You need this for your tax return.

Will I receive a Form 1099 for the settlement?

Not always. Wrongful death settlements are not always reported on a 1099, even when part of the award is taxable. Keep your settlement agreement and any correspondence about the breakdown of damages. If you believe a 1099 should have been issued, contact the defendant's attorney or insurance company and request one.

Does a structured settlement change the tax treatment?

The installment payments themselves are not taxable, but any interest or earnings on the money between payments is taxable. Ask your attorney how much interest the structured settlement will generate and whether that interest is taxable before you agree to the structure.

What if I received the settlement in a different state?

Missouri does not tax the settlement, but the state where the injury occurred or where the defendant is located may have different rules. Your attorney can advise on whether another state's tax law applies to your case.