Dear Tax Talk,
Will there be taxes due on a settlement from a lawsuit involving elder abuse? Mother passed away due to poor care by a doctor and nursing home in California. A suit was filed against the doctor and nursing home, and the case was settled out of court.
— LB

Dear LB,
The taxability of a settlement depends on the nature of the claim, not whether the settlement was court-ordered. An elder abuse claim would be considered a personal injury.

Awards for personal injury are not taxable — including awards made to heirs of the injured party. State laws vary, but usually follow the IRS in what is considered taxable income. Most likely California would not tax the settlement, but you should double-check with the state franchise tax board.

A settlement for personal injury would be considered an asset of the estate of the decedent. Depending on the year of her death and her other assets, estate taxes may be due. The estate tax exemption has been steadily increasing over the years. Based on the decedent’s year of death, here are the tax exemptions and maximum rates since 1997:

Estate tax exemption
Year Estate tax exemption Top estate tax rate
1997 $600,000 55%
1998 $625,000 55%
1999 $650,000 55%
2000 $675,000 55%
2001 $675,000 55%
2002 $1,000,000 50%
2003 $1,000,000 49%
2004 $1,500,000 48%
2005 $1,500,000 47%
2006 $2,000,000 46%
2007 $2,000,000 45%
2008 $2,000,000 45%
2009 $3,500,000 45%

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

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