You pay taxes on your “taxable income.” When you recover compensation for your financial losses through a wrongful death claim or lawsuit, this money is not considered income by the Internal Revenue Service (IRS). That means you generally do not have to pay taxes on wrongful death settlement payouts. 

However, there can be exceptions to this rule. When a death occurs due to highly reckless or malicious intent, a Texas court may award punitive damages. Punitive damages do not compensate you for your financial losses. Instead, they are a form of financial punishment meant to detour others from similar egregious behavior. Punitive damages are typically taxable. You’ll get a 1099 form that must be included with your taxes when you file.