Agreeing to a settlement, winning a lawsuit, or filing a claim against an asbestos bankruptcy trust will all provide compensation for the pain and suffering that mesothelioma victims suffered, as well as the expenses involved in their illness. Almost all of these awards aren’t subject to tax, but some financial awards are. Here’s what you need to know about your tax obligations if you’ve received mesothelioma compensation.
Different Types of Mesothelioma Compensation Get Different Tax Treatments
There are many different types of compensation available to people who have been affected by mesothelioma. Victims can file mesothelioma lawsuits seeking compensation from the companies responsible, and these claims can either be settled between the parties or decided in court by a judge and jury. These claims can be filed by either the mesothelioma victim or their survivors. Victims can also file claims with one of the many asbestos bankruptcy trust funds that have been set up specifically to benefit those who were negligently exposed to asbestos.
The compensation that is available from each of these different options varies, and so does their tax status. Though money received from a mesothelioma settlement or an asbestos bankruptcy trust fund is generally not taxable, things get more complicated when it comes to compensation won in a personal injury lawsuit. Though you won’t be taxed on money you’re awarded as compensation for economic damages like medical expenses, lost wages, and pain, money received for punitive damages is subject to tax, and so is any interest that’s earned on compensation that’s paid out in installments.
The IRS Tax Code Says Mesothelioma Injury Compensation is Not Taxable
In 1996, Congress passed the Small Business Protection Act of 1996. This law made changes to a lot of financial rules, including those surrounding the minimum wage, pension plans, and how small businesses were taxed.[1] It also addressed other aspects of financial life, including whether and how compensation awarded in a personal injury lawsuit would be taxed. This was of significant interest to people diagnosed with malignant mesothelioma and other asbestos-related diseases because it meant that they could keep all of the money that they received for their injuries, without having to pay taxes to the government.
The new law amended a previously written section of the Internal Revenue Service tax code. It allows people awarded compensation for a personal injury to keep their money without having to pay taxes on the money to the government as if it were income. This nontaxable status holds whether the award comes from a jury verdict, a settlement, or an asbestos bankruptcy trust fund. It doesn’t matter whether the person awarded the money is the victim or a loved one filing a wrongful death claim on their behalf. As long as the money is awarded or agreed upon to reimburse the victim for damages related to their diagnosis, including medical expenses, lost wages, and pain and suffering.[2] This is important because, in some mesothelioma jury trials, victims are awarded additional compensation for punitive damages.
Punitive Damage Awards Paid in a Mesothelioma Claim Are Taxable
Punitive damages are a different, additional type of compensation that juries can award to victims in personal injury lawsuits. In mesothelioma lawsuits, when a jury decides that an asbestos company’s actions were malicious, or reckless, or showed such disregard for the victim that they deserve punishment, the jury can award what are called punitive damages.
Punitive damages are meant to send a warning message to the defendant and to others who might act in the same way. Though they are important and often well deserved, they do not represent reimbursement to the victim in the same way that compensation for an injury does. The government considers punitive damages to be a windfall like winning the lottery and says that they are taxable.[3]
Interest Earned on Mesothelioma Compensation is Taxable
In some mesothelioma litigation, plaintiffs’ awards earn interest. Sometimes this is because they choose to be paid out over time instead of in a lump sum, and in other cases, they are awarded interest on money that was withheld before a judgment was made. Sometimes interest accrues when a judgment is handed down but the asbestos company files an appeal of the jury’s decision, delaying payment of the award. Whatever the reason for the plaintiff not getting their compensation right away, the interest that is earned on that withheld money is also taxable, even if it was for a non-taxable award for medical expenses. This is because it is not considered reimbursement for a medical expense.[3]
VA Disability Compensation is Not Taxable
Many mesothelioma victims are veterans of America’s military who were exposed to asbestos during their time of service. They are entitled to Disability Compensation. This benefit is not taxable.[4]
Seek Professional Help for Your Tax Questions About Mesothelioma Compensation
Mesothelioma lawsuits can have unpredictable and complicated outcomes. You may find that some of the companies named in your claim want to settle, while others insist on litigating and having the case resolved by a jury – and some of those juries may decide to assign punitive damages beyond compensatory damages. This type of complexity makes it very hard to know whether you owe taxes or not, let alone how much you owe. Tax laws surrounding mesothelioma compensation are complicated, and to make matters worse, the U.S. government is constantly changing its rules.
It’s a good idea to consult with a tax adviser or financial expert as soon as you begin your legal journey, as the more you know ahead of time, the better prepared you will be. It is especially important to meet with a professional who is familiar with your state’s tax code, as every jurisdiction has its own laws and regulations which may be different from federal tax laws.
