8 Min Read
Last Updated: 05/06/2024
Fact Checked

Written by Daniel Wasserberg | Edited By Walter Pacheco

Is Mesothelioma Compensation Taxable Income?

Mesothelioma compensation awarded for medical expenses is not generally taxable, but some forms may be subject to taxation.

The U.S. Internal Revenue Service, or IRS as it is commonly known, is the agency that collects taxes and sets guidelines for taxation of compensation awarded through legal action. The IRS taxes mesothelioma compensation received through a settlement or jury verdict the same way. 

According to the Small Business Job Protection Act of 1996, which amended section 104 of the IRS tax code, compensation awarded in direct connection to a personal injury is not taxable. This includes medical-connected compensation awarded through mesothelioma personal injury and wrongful death claims.

Different factors affect why compensation is awarded in a mesothelioma lawsuit. Medical expenses, pain and suffering, emotional distress, lost income, travel expenses and other factors impact the total award. 

Compensation awarded for anything related to the mesothelioma diagnosis is not taxable, including medical expenses, pain and suffering and emotional distress caused by the diagnosis. 

One type of mesothelioma compensation that is usually taxed is punitive damages, but this type of compensation is generally rare to receive. Interest earned on mesothelioma compensation is also usually taxed.   

Variables Affecting Taxation

According to section 104 of the IRS tax code, certain variables may affect taxation of mesothelioma compensation, including: 

  • Where you live
  • Jurisdiction in which your case was filed
  • Local and state taxes where you reside
  • Any pre-settlement agreements or tax deductions that may have been made before compensation was awarded

This topic is complex and best understood with the help of a mesothelioma attorney and a tax professional such as a certified public accountant, tax attorney or an enrolled agent licensed by the IRS.  

Are Mesothelioma Settlements Taxable?

In general, compensation received through a mesothelioma settlement is not taxable. According to section 104 of the IRS tax code, compensation awarded in direct connection to personal injuries or sickness is not taxed.

Settlement figures are typically based upon the financial, physical and emotional distress the plaintiff has endured as a result of their mesothelioma diagnosis. Mesothelioma settlements are most often reached through private negotiations between attorneys representing the plaintiff and defendant. 

Taxation gets complex when compensation is awarded through multiple channels in a single case such as through a settlement and a jury verdict. An experienced mesothelioma attorney will know how to interpret section 104 of the IRS tax code to estimate your final compensation accurately. This situation is less common but possible. Most mesothelioma claims are settled out of court before trial begins.

Some cases go to trial and reach a jury verdict, but some of the defendants will settle before a verdict is issued. This can result in a mix of settlements and a jury verdict, and the verdict may involve punitive damages. A situation like this would likely result in a plaintiff paying taxes on punitive damages but not settlements or verdicts related to their mesothelioma diagnosis. 

The plaintiff might also end up paying taxes on any interest earned over time on the settlement or verdict if they opt against a lump sum payment. 

Tax Liability by Mesothelioma Claim Type

Mesothelioma compensation received through a lawsuit or a trust fund claim should be taxed the same way, according to section 104(a)(2) of the tax code. It shouldn’t matter whether the compensation comes through a settlement or a verdict, a lawsuit or a trust fund, it will be taxed the same regardless. 

In any type of claim, plaintiffs may opt for compensation to be distributed over time rather than in a lump sum. Interest earned over time on this compensation is usually subject to taxation.  

Taxable Types of Mesothelioma Compensation 

Taxable types of mesothelioma compensation defined in section 104 of the tax code may include punitive damages, interest that accumulates while a settlement is being processed and interest earned over time when plaintiffs opts against a lump-sum payout.

Additionally, families can expect to pay taxes on attorney fees, which are paid as a percentage of the compensation you are awarded. 

Punitive Damages

The Small Business Job Protection Act of 1996 amended the IRS tax code to clarify that punitive damages are not excludable from taxable income regardless of whether they are connected to a physical injury. 

The American Bar Association, also known as the ABA, reports that punitive damages are taxed without exception. 

Punitive damages are typically awarded to punish a wrongful company for their actions and deter them from repeating the offense in the future. They are considered taxable because they are awarded in connection to the defendant’s bad behavior and not the plaintiff’s physical injury. 


Any interest that is earned while your mesothelioma settlement is being processed is usually subject to taxation, per regulations set in section 104 of the tax code. If you opt to receive compensation over time in installments, you will likely have to pay taxes on the interest earned.

The IRS seems to treat this like income that would come from an investment. 

Nontaxable Types of Mesothelioma Compensation

Compensation awarded in connection to your mesothelioma diagnosis is generally nontaxable. This includes compensatory damages for personal injury and wrongful death claims. 

Personal Injury and Wrongful Death Damages

The IRS usually does not tax compensation awarded in direct connection to personal injury and wrongful death damages, according to section 104(a)(1). The 1996 amendment states that any compensation connected to physical injury, including wrongful death, is not considered taxable income. Many mesothelioma claims are filed after the death of a loved one

Medical Expenses

Compensation awarded for medical expenses is not generally taxable. Examples include:
  • Doctor visits
  • Surgery, chemotherapy, radiation and immunotherapy
  • Physical therapy and mental health therapy
  • Prescriptions and over-the-counter medication
  • Hiring a home health aide
  • Health insurance premiums
  • Transportation costs for medical care

Another exception may involve transportation costs incurred by choice. For example, if you choose to travel to a distant location to access medical care that you could receive in your local area, the costs of that transportation are often not tax deductible. 

Lost Wages

The IRS says that compensation received in connection to physical injuries, including lost wages, is not considered taxable income. According to Revenue Ruling 85-97, 1985-2 C.B. 50, compensatory damages, including lost wages, received on account of personal physical injury are excluded from taxable income. 

The 1996 amendment clarified that as long as the lost wages are “on account of personal injuries” and tallied from the time in which the patient was out of work as a result of their injury, they will not be taxed. This is typically the case in mesothelioma claims. 

Lost wages are usually considered taxable in legal claims that don’t involve personal injuries such as lawsuits involving contractual relations, property rights, personal interests or defamation. 

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Taxes on Other Compensation Claims

People with mesothelioma often turn to multiple sources of compensation to deal with their diagnosis. Some of these are taxable and others are tax-exempt. 

VA Claim Taxation

VA disability compensation for mesothelioma is not taxable. According to IRS Publication 525 (2019), the IRS doesn’t tax any disability benefit awarded to veterans by the Department of Veterans Affairs.

Financial Aid Taxation

Forms of financial aid may include insurance benefits, money received through Medicare or Medicaid, workers’ compensation claims and medical grants or travel grants. 

The IRS usually does not consider health insurance benefits as taxable income, nor do they tax benefits received through Medicare or Medicaid. Money received through medical grants is frequently tax-exempt, but certain travel grants may be subject to taxation if they aren’t directly related to medical care. 

Money received through workers’ compensation benefits for an injury also should not be taxable. Other types of workers’ compensation, such as Social Security Disability Insurance or Supplemental Security Income, are usually taxable. 

Taxation of mesothelioma compensation can get complicated, which is why it is important to work with an experienced mesothelioma attorney who is familiar with all aspects of mesothelioma litigation. They can also guide you on how the statutes of limitations might apply in your case and how you can avoid it.

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