Is elder abuse settlement taxable?

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:

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