Are Lawsuit Settlements and Verdicts Taxable Income?

U.S. federal law does not usually tax mesothelioma settlements and verdicts. They fall under Internal Revenue Service (IRS) exceptions on taxable income. These exceptions apply to money received for personal physical injuries or sicknesses. Most mesothelioma compensation meets this definition.

Parts of a settlement or verdict may be taxable in some cases, but rarely the full amount. State tax law around compensation may differ from federal tax law.

Continue reading to learn when and how mesothelioma lawsuit settlements and verdicts are taxed.

What Lawsuit Settlements Are Tax-Free?

In general, personal injury lawsuits are not taxable. If you develop mesothelioma, you will likely file a lawsuit against parties responsible for your asbestos exposure. Compensation from successful mesothelioma lawsuits is intended to cover various types of costs, including:

• Lost wages and earning potential related to the inability to continue working
• Medical expenses for diagnosis and treatment costs
• Pain, suffering and emotional distress from the illness

Damages awarded to pay these costs aim to address victims’ losses due to their illness or injury. Other damages may also be awarded. Depending on various factors, the plaintiff (victim) may be taxed on applicable portions of compensation.

When Is Personal Injury Compensation Taxable?

Settlements and verdict awards may involve taxable compensation. For instance, portions of an award may be taxed for:

• Compensation for previously deducted medical expenses
• Interest earned on the settlement
• Punitive damages, which intend to punish the defendant (wrongdoer) rather than compensate the victim for losses

As noted earlier, lost wages are not typically taxed. Awards for lost income that would normally be subject to taxation may still be taxable. A mesothelioma lawyer can fully review and explain the terms of a settlement or verdict.