Are There Taxes on Mesothelioma Lawsuits and Settlements?

The United States Internal Revenue Service (IRS) is responsible for taxing income, including some types of income awarded by the settlement of a lawsuit. For those affected by mesothelioma, legal compensation is the primary form of reimbursement. Depending on several factors of your settlement, you may owe taxes from the earnings of your asbestos lawsuit.

Usually, mesothelioma lawsuits end before the case reaches trial – commonly known as a settlement. Sometimes, cases go to trial and end with a jury’s verdict – either in favor of the plaintiff or defendant. According to Section 104 of the IRS code, the same taxes apply to settlements awarded before a trial starts and compensation from a jury verdict.

Typically, lawsuit settlements granted for physical injuries or sickness (such as mesothelioma) are exempt from taxes.

Factors of your lawsuit that may affect your tax liability include:

  • Case jurisdiction (where the lawsuit is filed)
  • Certain pre-settlement agreements
  • State of residence
  • Your state’s taxes (and city taxes)

Taxing Personal Injury and Wrongful Death Lawsuits

Typically, mesothelioma lawsuits consist of personal injury and wrongful death suits. People who have been diagnosed with mesothelioma (or another asbestos-caused disease) tend to file personal injury lawsuits. Conversely, family members, caretakers, and friends may file a wrongful death lawsuit.

Personal injury lawsuits are generally exempt from being taxed. These cases compensate plaintiffs for the consequences of their cancer diagnosis like lost wages, medical costs, and travel expenses. In cases where plaintiffs provide adequate documentation supporting their expenses, they are usually exempt from taxes.

Similarly, wrongful death case settlements are not considered taxable. The proceeds from these cases are often the result of compensatory damages. However, in some states, wrongful death settlements are categorized as punitive damages against the negligent company.

According to the U.S. tax code, punitive damages are taxable. Unlike compensatory damages rewarding plaintiffs for injuries, punitive damages penalize companies for their actions. A court may also award punitive damages in addition to compensatory settlements to discourage future corporate negligence.

Some tax laws allow a portion of punitive damages to stay untaxable. Refer to an experienced asbestos lawyer or certified public accountant (CPA) for details about the applicable state and federal tax laws.

Asbestos Trust Fund Claims and Tax Liability

Many asbestos manufacturers knowingly allowed the widespread use of asbestos-contaminated materials. Large companies like Johns-Manville and W.R. Grace filed bankruptcy after a wave of personal injury litigation. Their actions resulted in thousands of work-related exposures and deaths.

Consequently, personal injury and wrongful death lawsuits are common forms of legal compensation for those affected by mesothelioma. An attorney can also help you file an asbestos trust fund claim to receive compensation from companies that declared bankruptcy.

The IRS recognizes asbestos settlements (including trust fund claims and jury verdict amounts) as the same type of nontaxable income in most cases.

What Percentage of a Settlement Is Taxable?

The IRS does not generally tax mesothelioma settlements until a set “cap” or percentage is set. Instead, certain aspects of a settlement’s total might be considered taxable.

For instance, any portion of a settlement awarded for back-pay or severance pay is taxable by the IRS. Back-pay, prorated pay, dismissal pay, and severance payments are part of an individual’s “ordinary income.” Under normal circumstances, you would pay taxes on this income anyway. As such, back-pay added to a settlement total is still taxable.

Another portion of your settlement that could be taxed includes settlement amounts added for “emotional distress” or “mental anguish.” However, Section 104 only protects “personal physical injuries or physical sickness” settlements from taxation.

Though patients suffer many physical effects of emotional distress (such as the physical effects of depression and anxiety), this portion of a settlement is still taxable.

You may have some tax liability from your settlement if it includes:

  • Discrimination suits
  • Employment-related lawsuits
  • Interest from payments over time or a lump sum
  • Punitive damages to punish the company
  • Some untaxed lost wages and lost profits reimbursements

Paying Taxes on Settlement Interest

A common form of tax liability for mesothelioma settlements is taxes owed for interest. Your settlement may accrue interest while being processed. Also, if you choose to receive settlement payments instead of a lump sum, your settlement will likely earn interest.

Interest is taxable – no matter what type of asbestos legal claim was filed. The IRS taxes settlement interest and investment interest similarly.

Do Mesothelioma Lawyer Fees Affect Taxes?

In most cases, mesothelioma attorneys work on a contingency fee basis. In this case, plaintiffs don’t need to worry about paying a retainer fee or other upfront costs when signing a contingency fee contract with an asbestos lawyer. Instead, your attorneys deduct their payment from the settlement total.

It’s important for plaintiffs to keep this in mind when filling out their tax forms. A settlement in the amount of $750,000 with a contingency fee of 30% would leave $525,000 remaining. However, you must report the full settlement amount of $750,000.

Consult your mesothelioma attorney or a certified tax professional for more information about what you need to file taxes after a settlement.

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Other Tax Concerns for Mesothelioma Patients

In addition to legal compensation, mesothelioma patients and their family members often rely on other forms of income and benefits. Certain types of disability and retirement income are taxable, while others are not.

  • Medicare and Medicaid – Money received from federal healthcare programs like Medicare and Medicaid is generally not taxable.
  • Social Security Disability Income (SSDI) – Depending on your total income and which state you live in, your SSDI could be subject to taxation.
  • Supplement Security Income – Normally not considered taxable by the IRS.
  • VA disability compensation – Disability payments from the U.S. Department of Veterans Affairs (VA) for a mesothelioma diagnosis or other service-connected injury or illness are not taxable.
  • Workers’ compensation – Like personal injury lawsuits, payments for physical injuries and sicknesses are not usually taxable.

An accountant can give you the best advice for your finances.

Mesothelioma Support Team

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