Taxation of mesothelioma settlements and other forms of mesothelioma compensation is complex. Compensation connected to medical expenses isn’t taxable, but some other forms of compensation are, including punitive damages and interest earned when compensation is distributed over time.
Written by Danielle DiPietro | Edited by Amy Edel | Last Update:
Mesothelioma compensation awarded for medical expenses generally isn’t taxable, including medical expenses, pain and suffering and emotional distress the diagnosis caused. However, one type of compensation that is usually taxed is punitive damages from a trial verdict. Interest earned on mesothelioma compensation is also usually taxed.
The U.S. Internal Revenue Service sets guidelines for the taxation of compensation awarded through legal action in section 104 of the tax code. 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 the tax code, compensation awarded in direct connection to a personal injury isn’t taxable. This includes medical-connected compensation awarded through mesothelioma personal injury and wrongful death lawsuits.
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.
Section 104 of the IRS tax code outlines certain variables that may affect taxation of mesothelioma compensation. Attorneys and tax professionals use these variables to estimate your final compensation accurately.
Factors That Affect Taxation
This topic is complex, and a mesothelioma attorney or tax professional can help you navigate it. A certified public accountant, tax attorney or an IRS-enrolled agent has the expertise to interpret these variables accurately.
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In general, compensation from mesothelioma settlements isn’t taxable. Settlement figures are typically based on the plaintiff’s financial, physical and emotional distress as a result of their mesothelioma diagnosis.
Mesothelioma cases typically involve multiple defendants, and most claims are settled out of court before trial begins. Some cases go to trial, but some of the defendants may settle before a verdict is issued, resulting in a mix of settlements and a jury verdict in the same case.
When that happens, the settlement portions remain non-taxable but the verdict may include punitive damages, which are taxable. Plaintiffs who opt against a lump sum payment may also owe taxes on any interest earned over time on their award.
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.
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Taxable types of mesothelioma compensation may include punitive damages, interest that accumulates while a settlement is being processed and interest earned over time when plaintiffs opt against a lump-sum payout. Taxable amounts are generally taxed as ordinary income at your applicable federal and state tax rate.
Families can also expect to pay taxes on attorney fees, which are paid as a percentage of the compensation you’re awarded. A mesothelioma attorney can help estimate what portion of your total compensation will be subject to taxation.
The American Bar Association reports that punitive damages are taxed without exception. They’re considered taxable because they’re awarded in connection to the defendant’s bad behavior and not the plaintiff’s physical injury.
Punitive damages are typically awarded to punish a wrongful company for their actions and deter them from repeating the offense in the future. Courts award them separately from compensatory damages, which means they don’t qualify for the personal injury exclusion under the tax code.
Any interest earned while your mesothelioma settlement is being processed is usually subject to taxation. If you opt to receive compensation over time in installments, you’ll likely pay taxes on the interest earned as well. The IRS treats both as investment income.
Several types of mesothelioma compensation qualify for the personal injury exclusion under federal tax law. This includes compensatory damages for personal injury and wrongful death claims, reimbursements for medical expenses and lost wages tied to your physical injury. Federal tax law excludes these amounts because they’re tied directly to a physical injury rather than financial gain.
The IRS doesn’t tax compensation awarded in direct connection to personal injury or wrongful death damages. Families who file asbestos claims after the death of a loved one can expect wrongful death awards to cover both the patient’s pre-death losses and the family’s damages, such as loss of consortium, and none of it’s considered taxable income.
While most costs tied to a mesothelioma diagnosis and treatment aren’t taxable, one exception is elective travel. If a patient chooses to travel to a distant location to access medical care that they could receive locally, the costs of that transportation often aren’t tax-deductible. The IRS considers this different than typical medical costs.
Medical Expenses That Aren’t Taxable
Settlement reimbursements for medical costs aren’t taxable, but patients may still get a tax break on expenses a settlement or insurance didn’t cover. The IRS allows a deduction for out-of-pocket medical costs that exceed 7.5% of adjusted gross income, claimed on Schedule A. This can include treatment costs, travel for medical care and medications. A tax professional can help determine which expenses qualify.
The IRS doesn’t consider lost wages taxable when they’re connected to a physical injury. Revenue Ruling 85-97 confirms that compensatory damages for lost wages tied to a physical injury aren’t taxable income.
The 1996 amendment added an important clarification: lost wages are only non-taxable when they’re tallied from the time a patient was out of work because of their injury. This is typically the case in mesothelioma claims, since the diagnosis itself is what prevents patients from working.
Lost wages become taxable in claims that don’t involve physical injuries, such as lawsuits involving contractual disputes, property rights or defamation. A mesothelioma attorney can help ensure lost wages are documented in a way that preserves their non-taxable status.
Filing a mesothelioma claim is the main way families pay for medical treatment, travel expenses and other costs after. Get an inside look at the claims process.
Get a Free RecordingPeople with mesothelioma often turn to multiple sources of compensation to manage their diagnosis. These can include insurance benefits, Medicare or Medicaid, workers’ compensation, medical grants, travel grants and VA disability benefits. Some of these are taxable and others are tax-exempt.
VA disability compensation for mesothelioma isn’t taxable, according to IRS Publication 525. According to the VA, Dependency and Indemnity Compensation paid to surviving spouses and dependents is also tax-exempt. Veterans who receive an increase in their VA disability rating may be eligible for a federal tax refund for prior years.
The IRS doesn’t consider health insurance benefits taxable income and doesn’t tax benefits received through Medicare or Medicaid. Medical grants are frequently tax-exempt, but the IRS may tax certain travel grants if they aren’t directly related to medical care.
Workers’ compensation benefits for an injury aren’t taxable, but Social Security Disability Insurance and Supplemental Security Income are usually taxable. The key factor is total combined income, as SSDI is only taxable when it exceeds IRS thresholds.
For individual filers, up to 50% of SSDI benefits may be taxable when combined income falls between $25,000 and $34,000; above $34,000, up to 85% may be taxable. Mesothelioma patients whose primary income is a non-taxable settlement combined with SSDI may fall below these thresholds and owe little or no tax on their disability benefits.
Taxation of mesothelioma compensation is complex, and an experienced mesothelioma attorney can help navigate it. They can also advise on how statutes of limitations apply to your case.
Whether you receive a 1099-MISC for your mesothelioma settlement depends on which portions of the award are taxable. The defendant or their insurer may file a 1099-MISC with the IRS and send you a copy for taxable amounts such as punitive damages and accrued interest. Non-taxable compensatory amounts, including personal injury damages and medical expense reimbursements, generally aren’t included in a 1099. Keep all settlement paperwork and consult a tax professional to confirm what has been reported on your behalf.
Taxable portions of a mesothelioma settlement, such as punitive damages and accrued interest, must be reported as income on your federal tax return. Non-taxable compensatory damages, including personal injury awards, medical expense reimbursements and lost wages tied to physical injury, generally don’t need to be reported as income. Keep documentation of the settlement terms to support the non-taxable treatment of those amounts. If you receive a 1099-MISC, a tax professional can help you correctly report the award and claim all applicable exclusions.
You can’t avoid taxes on legally taxable portions of your settlement, but there are strategies that may reduce your overall tax liability. A structured settlement, where payments are distributed over time rather than in a lump sum, may keep each payment in a lower tax bracket. Unreimbursed qualified medical expenses may also be deductible on Schedule A of your federal return if they exceed 7.5% of your adjusted gross income. A CPA or enrolled tax agent experienced in personal injury awards can identify all available deductions and help you structure your settlement in the most tax-efficient way.
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Asbestos.com. (2026, April 20). How Mesothelioma Compensation Is Taxed. Retrieved April 28, 2026, from https://www.asbestos.com/mesothelioma-lawyer/compensation/taxable/
"How Mesothelioma Compensation Is Taxed." Asbestos.com, 20 Apr 2026, https://www.asbestos.com/mesothelioma-lawyer/compensation/taxable/.
Asbestos.com. "How Mesothelioma Compensation Is Taxed." Last modified April 20, 2026. https://www.asbestos.com/mesothelioma-lawyer/compensation/taxable/.
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Danielle DiPietro is a Financial Advocate and VA-accredited claims agent at The Mesothelioma Center, the nation’s most trusted mesothelioma resource. She helps all mesothelioma patients and their families, including veterans, find the best answers to their financial and VA questions.
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