Are Mesothelioma Settlements Taxable?
The average mesothelioma settlement ranges between $1 million and $1.4 million. So what portion of that amount is taxable? The Internal Revenue Service (IRS) treats some but not all money awarded in a mesothelioma settlement as taxable income.
When a mesothelioma lawsuit is settled, victims of asbestos-related diseases are usually awarded financial compensation for one of two reasons:
- Personal injury: Personal injury compensation is given to mesothelioma victims to pay for medical bills, protect their family’s financial security, and cover other health care expenses. Personal injury awards are not taxable as per current IRS guidance.
- Punitive damages: Punitive damages are awarded to asbestos victims to punish the manufacturers of asbestos-containing products. Punitive damages are always taxable, according to the American Bar Association (ABA).
There are some exceptions to these rules. For example, if a mesothelioma patient deducted medical expenses on their tax return before receiving a settlement, they may have to pay taxes on some of the settlement money.
“The key question to ask is: ‘What was the settlement (and its corresponding payments) intended to replace?'”
—Internal Revenue Service
Determining which types of compensation are taxed in a mesothelioma settlement can be confusing and difficult to understand without legal help. Thankfully, mesothelioma patients can work with an experienced asbestos lawyer to learn how taxes may affect their settlement amounts.
- Tax codes and laws that affect settlements are managed and enforced by the IRS.
- According to the ABA, both settlements and trial verdicts are taxed in the same manner.
- Federal, state, and local laws affect how mesothelioma settlements are taxed. As a result, where you live plays a role on how — and how much — you are taxed.
- Mesothelioma lawsuits usually award money for several reasons, so parts of a settlement may or may not be taxed.
- How you decide to receive your settlement — in a single lump-sum payment or in installments — shouldn’t affect the amount of taxes you owe. However, you may owe taxes on the interest accrued on installment payments.
Overwhelmed? Confused? You’re Not Alone.
If trying to figure out the tax ramifications of a mesothelioma settlement overwhelms you, you’re not alone. That’s why it’s vital to work with a top law firm experienced in handling asbestos exposure and mesothelioma cases. They can walk with you through the entire legal process — from filing a claim to collecting compensation and preparing for any taxes owed.
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Mesothelioma Taxable Settlements Overview
Several portions of mesothelioma compensation are considered taxable income. Any part of mesothelioma financial compensation that does not directly relate to the victim’s injuries may be subject to taxation.
Mesothelioma taxable settlements include financial compensation such as:
- Attorney fees
- Lost wages
- Punitive damages
- Other compensation
Let’s look in detail at each part of mesothelioma taxable settlements.
In some situations, courts may order manufacturers of asbestos-containing materials to pay punitive damages to victims. This is because these companies knew asbestos was dangerous for decades but continued to use the deadly mineral to make a profit.
According to the IRS, all punitive damages should be reported as “Other Income” on a 1040 form when filing taxes.
Attorney fees may impact the overall value of a mesothelioma settlement depending on how much taxable compensation is awarded.
Most mesothelioma lawyers work on a contingency basis, meaning they charge no upfront fees. This arrangement allows top mesothelioma law firms to offer their services to a wide group of people who may not have the finances to pay for legal representation. These lawyers receive a percentage of the total amount of compensation awarded at the end of the case instead of charging by the hour or requiring upfront payments. This innovative model allows everyday people access to representation by the best mesothelioma lawyers and law firms in the country.
Based on a U.S. Supreme Court decision, people who file lawsuits are taxed on 100% of the verdict or settlement before the attorney fees are deducted if the money they recover is considered taxable income.
For example, if a couple receives $100,000 from a jury verdict and their lawyer takes one-third of that amount, they will still be taxed as if they received $100,000 if the compensation is entirely taxable.
Individuals who receive a mesothelioma diagnosis while they are working usually stop working or retire while they undergo mesothelioma treatment. These individuals may receive a settlement offer that includes their loss of income.
For tax year 2022, the IRS considers settlement awards for lost wages taxable income because they essentially replace the income the victim would have earned if they were still working.
Other Mesothelioma Taxable Settlements Compensation (Interest & Pension Rights)
Several other factors can affect whether parts of a mesothelioma settlement may be taxed, including:
- Interest: All interest that accumulates while payments are processed is subject to taxation, according to the ABA.
- Pension rights: Settlements that include pension rights are taxed at the same rate as any other pension income.
A mesothelioma lawyer can help determine what other financial awards may be subject to taxes in each case. Download Free Attorney Checklist of Questions to get the answers you need when discussing your legal options.
Non-Taxable Mesothelioma Compensation
There are several parts of mesothelioma settlement compensation that are usually not taxable.
Non-taxable forms of financial compensation can include:
- Emotional distress
- Medical expenses
- Personal injury lawsuit damages
- Wrongful death damages
Treating a single case of mesothelioma can easily cost more than $400,000. Mesothelioma lawyers will typically seek to win non-taxable compensation to cover as much of these expenses as possible and secure additional payments for the victim’s pain and suffering.
Learn more about the non-taxable portions of mesothelioma compensation below.
As part of personal injury cases, a mesothelioma lawyer must prove that the asbestos physically harmed the victim to receive tax-free personal injury compensation.
A mesothelioma legal team can prove this by presenting medical records and other documents that demonstrate that the victim developed mesothelioma or another asbestos-related disease such as asbestosis or lung cancer due to the negligence of the manufacturers.
The IRS states that medical expenses count toward a victim’s personal injury costs. Therefore, medical treatment costs for emotional and physical injuries are usually non-taxable.
Medical expenses to treat mesothelioma may include:
- Doctor visits
- Physical therapy
- Psychologist or counselor visits
- Other treatments
That being said, medical expenses may be taxed in some cases. For example, a mesothelioma patient who deducted medical expenses on a tax return before their lawsuit was settled may owe taxes.
A wrongful death claim can be filed by spouses, children, family members, or anyone representing the estate of someone who died from mesothelioma.
According to the IRS, money from a wrongful death lawsuit may or may not be subject to taxes depending on state laws.
Some states classify wrongful death compensation as both punitive damages and personal injury damages, while others award all wrongful death compensation as punitive damages.
Whether or not emotional distress damages are taxable is a complex subject. According to the IRS, emotional damages are only free from taxes if they directly stem from the victim’s injuries.
Since mesothelioma is almost always fatal, it may be possible for victims to recover tax-free damages for emotional distress as part of a settlement – but there are no guarantees.
Is Mesothelioma Workers’ Compensation Taxable?
Workers’ compensation is insurance that provides money to workers who get injured or sick on the job. A workers’ compensation claim cannot be taxed.
However, a mesothelioma lawsuit usually awards victims more compensation than a workers’ compensation claim – even when taxes are deducted. Mesothelioma lawyers typically advise clients that it is not worth the time or energy to file a workers’ compensation claim with a former employer.
Instead, they generally recommend that people seek compensation from asbestos companies that manufactured and sold asbestos-containing products.
In most cases, filing a mesothelioma lawsuit is the best option for victims. Mesothelioma attorneys can determine which options are best for you and your family. They can also suggest other forms of compensation, such as asbestos trust fund or VA benefit claims, in addition to filing an asbestos lawsuit.
Variables Affecting Mesothelioma Taxable Settlements
There are different circumstances that can impact taxes and the overall value of a mesothelioma claim. Some of these factors include the jurisdiction of the case and the state in which the victim lives.
Learn more about tax variables for mesothelioma compensation below.
Compensation and Income Tax
There are federal, state, and local income tax codes. Federal tax codes apply the same rules to every claim, whereas state and local codes vary depending on where you live.
For example, as of 2023, 43 states require residents to pay personal income tax, but the remaining seven do not. Local laws also affect how much income tax must be paid to the city, town, or county in which someone lives.
Other Compensation Tax Variables
Besides varying local and state tax variables, there are other factors that may affect mesothelioma taxable settlements.
Some of these factors include:
- Pre-settlement agreements: The plaintiff’s lawyers can work with the defendant’s lawyers to prevent unnecessary taxation on a settlement.
- Tax deductions: Victims may be able to deduct medical expenses and other costs of living to lower the taxes they owe.
The ABA recommends that asbestos victims work out a tax deal before their lawsuit is completed to maximize the compensation they receive.
“Before you resolve the case and sign, consider the tax aspects.”
—American Bar Association
With the help of an experienced mesothelioma lawyer, patients can learn all the possible variables that may affect their compensation and tax payments. Our Patient Advocates are here to get you started — chat with them live now.
Learn more about mesothelioma settlements and what your case may be worth.
Find an Experienced Mesothelioma Attorney
Working with a mesothelioma attorney can help you avoid any tax issues and win the most money from your settlement to take care of yourself and your loved ones.
Experienced mesothelioma attorneys can:
- Access databases of asbestos cases to build and support your claim
- Do the heavy lifting so you can focus on healing
- File a legal action correctly and within the proper statute of limitations
- Advise you on federal, state, and local tax laws
Get a free legal consultation today to see if you are eligible to seek financial compensation through a mesothelioma lawsuit.
Mesothelioma Taxable Settlements FAQs
Are mesothelioma lawsuit settlements taxable?
It depends. Although every case is different, damages related to personal injury are non-taxable, while punitive damages are taxable.
There are several other portions of mesothelioma lawsuit settlement compensation that may be subject to taxes.
What is the average payout for a mesothelioma case?
The average mesothelioma settlement awards anywhere between $1 million and $1.4 million.
The net financial compensation won in a mesothelioma lawsuit can vary based on several factors, including whether some of the money is considered taxable income.
How long does it take to get money from a mesothelioma settlement?
Each mesothelioma case is different, so settlement timelines can vary. Generally, the entire lawsuit process lasts around 12 months. However, some mesothelioma victims start receiving compensation in as little as 90 days.
How do I avoid paying taxes on a lawsuit settlement?
The best way to avoid paying unnecessary taxes on a lawsuit settlement is to partner with an experienced attorney.
The American Bar Association recommends that the plaintiff’s lawyer work with the defendant’s lawyer to minimize unnecessary taxes.
You may want to take installment payments instead of a lump-sum payment as a lump-sum payment could push your income into a higher tax bracket.
Again, an experienced attorney will know the different variables that can affect a client’s net settlement payout and will work to minimize your tax burden while following applicable tax laws.