Are Mesothelioma Settlements Taxable Income in 2026?

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Most parts of a mesothelioma settlement are not taxable. However, there are exceptions. Non-taxable parts of the settlement include the portions that compensate the patient for mesothelioma and the financial, emotional, social, and other effects it has on their life (also known as pain and suffering).

However, there are some aspects of compensation that may be taxable. For example, punitive damages imposed on the at-fault company are taxable, as is any interest received on the compensation. The patient may also have to pay taxes on medical expenses if they have already received a tax benefit for those on a previous return.

On this page, we explore the IRS and state tax rules on how mesothelioma settlements are taxed and how to minimize tax liability. We also explain what factors impact whether a mesothelioma settlement is taxable and clearly outline what parts may and may not be taxed. We also compare the tax implications of different settlement structures (lump-sum versus periodic payments) and types (court damages, VA benefits, etc.).

About the Taxability of Mesothelioma Settlements in 2025:

How Does the IRS Treat Mesothelioma Settlements?

The IRS does not tax most aspects of a mesothelioma settlement. Many times, the majority of a mesothelioma settlement is awarded for pain and suffering. This type of compensation is not typically taxable by the IRS.

As a general rule, the IRS taxes all income that someone receives, regardless of where it is from, unless it qualifies as an exception. The IRS has dozens of exceptions to the taxable income rule. Parts of someone’s mesothelioma settlement may qualify as an exception, meaning it would not be taxed even though it is income. Tax laws change frequently, so it is a good idea to check in with a lawyer and tax professional to see if there have been updates to these regulations.

General Rules on Taxable Income (IRC §61)

Generally, the IRS taxes all sources of income unless an exception applies. The IRS definition of income includes money from all sources, including compensation from a lawsuit. That said, some parts of a settlement are not considered taxable income. It depends on what the compensation is for. For example, a damages award to compensate someone because of a physical injury or sickness (like mesothelioma) would not be taxable. But punitive damages and interest may be taxable. However, punitive damages are not usually part of a mesothelioma settlement.

The Physical Injury Exception (IRC §104(a)(2))

The IRS may not tax a financial award that someone receives to compensate them for their physical injury or losses because of someone else’s actions. This might include things like pain and suffering, home modifications to accommodate the person’s mesothelioma-related physical limitations, and in-home care. If a case were to go to trial and a jury awarded punitive damages (financial penalties meant to punish the defendant), that portion of the award may be taxed. Likewise, interest and previously deducted medical expenses may be taxed.

Why Mesothelioma Compensation Is Usually Tax-Free

Most parts of someone’s mesothelioma settlement may be tax-free because it is paid out to compensate the patient for the costs associated with their diagnosis. Under Internal Revenue Code Section 142(a)(2), money paid to compensate someone for a physical injury or illness may not be taxed. This exception includes most of someone’s mesothelioma settlement, because it is money paid for their physical illness.

Additionally, surviving family members may not have to pay taxes on a wrongful death settlement they receive after their loved one died from mesothelioma. Family members filing a mesothelioma claim on behalf of a loved one should talk to their attorney about tax implications.

Which Portions of a Mesothelioma Settlement Are Non-Taxable?

The parts of a mesothelioma settlement that are meant to compensate the patient for their physical illness may not be taxed. Examples of potentially non-taxable portions of a mesothelioma settlement include the following:

• In-home care
• Medical treatments
• Prescription medication costs
• Pain and suffering
• Loss of quality of life
• Lost earning potential
• Emotional distress
• Wrongful death damages

If the person has already deducted some of the above on their tax return, they may have to pay taxes on that part of the settlement. For example, mesothelioma patients often pay large sums of money for health care. Under IRS code, if the amount paid in medical expenses is more than 7.5% of someone’s gross adjusted income, they can claim those expenses on their taxes. However, if they have already deducted past medical expenses, they cannot do that again when they file taxes. Similarly, they may have to pay back the net result of the previous claim.

Which Portions of a Mesothelioma Settlement Are Taxable?

The average mesothelioma settlement can be more than $1 million dollars. So, it is important to understand what portions might be taxed.

Here are the parts of a mesothelioma settlement that may be taxable:

• Punitive damages: The court might impose these to punish the defendant company for causing the asbestos exposure.
• Interest: The patient might receive interest on settlement payments or reimbursement.
• Lost income: If a patient was still working and had to miss time from work, they may have to pay taxes on the amount of compensation intended to cover that lost income. However, future earning potential is usually treated differently.
• Medical expenses previously deducted: The patient might have deducted medical care costs on a previous tax return, meaning they already received a tax benefit for it.

Punitive damages may be tax-free in mesothelioma wrongful death cases where the surviving loved ones can only receive punitive damages. However, this is a rare circumstance. There may be other situations where mesothelioma settlement portions may be taxed. Consult a tax professional to learn what the updated regulations say about taxed versus tax-free court damages.

How the Wording of a Mesothelioma Settlement Agreement Impacts Taxes

The parts of a settlement intended to compensate someone for having mesothelioma are usually tax free. But, because some types of compensation are taxable, it is important that attorneys properly structure settlement agreements. The settlement agreement describes the categories of the payout. Therefore, the wording can impact how the compensation is taxed. For instance, if the agreement says a certain amount is to reimburse the patient for their medical bills or compensate them for suffering, this may signal that it is tax-free. Additionally, the amounts claimed in the settlement should be supported by the law, facts (like receipts), and approval of the court.

Structured Settlements vs. Lump-Sum Payments

Because most aspects of a mesothelioma settlement are not taxed, receiving a structured (spread-out) payment versus a lump sum may not have many tax implications. The exception is when someone earns interest on a lump-sum award. Structured settlements and lump-sum payments may be tax-free when received; however, it depends on what the funds are being paid for. Money to compensate the patient for the losses associated with mesothelioma may be tax-free. Punitive damages and interest payments would be taxed, as would money received to reimburse the patient for medical expenses for which they had already claimed a tax deduction.

Tax Treatment of Lump-Sum Settlements

Lump-sum settlements are taxed the same way other court damages awards are. So, the portion meant to compensate the patient for the physical, emotional, social, and financial aspects of having mesothelioma would not be taxed. Other parts may be, though. Moreover, the patient would have to pay taxes on the income generated from that money later on. For example, they may have to pay taxes on interest, dividends, or other money earned if they invest portions of the settlement.

Tax Benefits of Structured Settlements

Structured settlements are a common and preferred option for mesothelioma patients. One reason for this is that the person can receive ongoing, tax-free financial support over a period of months or years. Patients may find this useful so they have a steady income stream and can plan accordingly. Again, the portions of these payments that are made to compensate them for their losses may be tax-free, unless an exception applies. But any money paid to punish the companies for their wrongdoing or any interest received for these payments may be taxed.

Handling Taxable Components in Structured Settlements

How the mesothelioma patient receives the money does not change whether it is taxed. Instead, the IRS looks at why the money is being paid and what it is for. For tax purposes, it can be helpful if the patient receives taxable and non-taxable compensation separately (if possible). Taking this approach can make it easier to report it to the IRS when the mesothelioma patient files for taxes each year.

Reporting Mesothelioma Settlements to the IRS

All taxable portions of a mesothelioma settlement must be reported to the IRS. The patient may also have to tell the IRS about the nontaxable portion of the mesothelioma settlement, even if the patient will not have to pay taxes on it. That said, it depends on the tax regulations in effect at that time. Patients should keep careful records of lump-sum or periodic payments they receive for their mesothelioma settlement so they can report these to the IRS or their tax professionals. A tax professional or mesothelioma lawyer is best positioned to tell you what the updated reporting rules are for your settlement.

When You May Receive a Form 1099

Some patients may receive a 1099 after their mesothelioma lawsuit concludes. One of these (the 1099-MISC) may be to report punitive or other court damages that are taxable. The other (1099-INT) is to report taxable interest payments. Additionally, 1099s may be sent out to the patient’s attorneys to report payments the attorneys received for their legal services. Make sure you keep all financial, legal, and tax documents you receive in connection with your mesothelioma lawsuit.

How to Report Punitive Damages and Interest

You report punitive damages and interest to the IRS by following their current instructions for those income types. For instance, “Interest Income” may be reported on Form 1040. The mesothelioma patient may also want to include a note to the IRS telling them that they received other funds from a lawsuit, but they believe those amounts are nontaxable. A tax professional can help the mesothelioma patient properly tell the IRS about the income they received and when they need to pay taxes on it.

State Tax Considerations

The mesothelioma patient may also have to pay state taxes on their mesothelioma settlement. Many states follow the same rules as the federal IRS; however, there are exceptions, and tax laws frequently change. The mesothelioma patient and their family should check in with a lawyer and tax professional to learn about the tax implications of their settlement.

Tax Treatment of Other Forms of Mesothelioma Compensation

Mesothelioma patients may also be eligible for other types of compensation, such as asbestos trust fund claims, Veterans Affairs disability benefits, and workers’ compensation. Each of these may be tax-free; however, it depends on the circumstances and tax laws in effect at that time. Moreover, federal and state tax laws may differ. So, there may be benefits that are nontaxable at the federal level but are taxable at the state level.

Asbestos Trust Fund Payouts

Mesothelioma patients may receive a payout from an asbestos trust fund created by a bankrupt business that caused their asbestos exposure. Usually, these claims would be tax-free because they compensate the patient for losses associated with a physical illness (mesothelioma). However, if the patient receives interest on these payments or reimbursement for previously-deducted medical expenses, these portions may be taxed.

Veterans Affairs (VA) Disability Benefits

Patients who served in the military and developed mesothelioma may qualify for disability benefits through the Veterans Affairs. The veteran may not have to pay taxes on these benefits; however, there are some exceptions for different types of financial support through the VA.

Workers’ Compensation Claims

If the patient developed mesothelioma from employment-related asbestos exposure, they may receive workers’ compensation. In most circumstances, benefits for work-related illnesses (like mesothelioma) would be tax-free. That said, there are exceptions, and receiving workers’ compensation can impact what you are eligible for through SSI (Supplemental Security Income) or SSDI (Social Security Disability Insurance). Additionally, some parts of your SSDI benefits may be taxable.

Insurance Reimbursements and Government Aid

In most cases, you would not have to pay taxes on your health insurance reimbursements and government aid you received (like Medicare or Medicaid) for medical care. However, you can only claim a tax benefit for these once. So, if you deducted healthcare insurance costs on a past return, you may have to pay taxes on reimbursements you receive for these in the future.

Which Factors Influence Taxability in a Mesothelioma Settlement?

Many different factors can impact how mesothelioma settlements are taxed. These include federal and state tax laws, what the money was for, and whether a one-time exemption was claimed in a previous year. Tax laws frequently change, so remember to consult legal and tax professionals to see what new regulations might affect your tax liability.

Jurisdiction and State Tax Rules

The federal and state governments each have their own tax rules. So, while something may be tax-free for federal income tax purposes, it may be taxable at the state level. For instance, wrongful death and punitive damages may be treated differently on a federal versus a state tax return.

Previous Tax Deductions for Medical Expenses

For some expenses, you can only claim a benefit once. For example, you may have paid medical expenses related to your mesothelioma in the past. If you claimed those payments on an already-filed tax return, you may not claim a second tax deduction for the reimbursement you receive for those same expenses. Tax laws change frequently and are heavily dependent on the individual circumstances. So, there may be exceptions to this rule that would make some or all of this reimbursement tax-free. Make sure to track all medical expenses and keep a careful record of all returns.

Settlement Structure (Periodic vs. Lump-Sum)

The structure of your settlement does not impact whether it is taxable or tax-free; however, what the money is classified as does affect its taxability. So, most money received as compensation for your mesothelioma-related losses may be nontaxable. But punitive damages, interest, and already-deducted medical care costs may be taxed. Likewise, if you reinvest the settlement and receive dividends, interest, or profits from that investment, those would be taxed per usual.

Future Changes in Tax Law

Tax laws change rapidly, and it is common for a regulation to be changed, removed, or reinstated from time to time. So, collaborate with an accountant, tax professional, or lawyer to understand how your mesothelioma settlement may be taxed in the current year.

How to Minimize Tax Liability in a Mesothelioma Settlement in 2025

Minimizing tax liability is top of mind for many mesothelioma patients. Here are some tips for how you can prepare for tax season:

• Make sure the settlement clearly labels compensation categories.
• Track medical expenses and deductions.
• Keep all tax documents you receive, especially those that relate to your settlement.
• Maintain an accurate record of the compensation you receive for your mesothelioma, even if you believe it is tax-free.
• Talk to legal and tax professionals about your mesothelioma settlement and how it may be taxed.

If you receive multiple types of compensation related to your mesothelioma, it is a good idea to keep a record of these as well. The IRS may want to see these documents to make sure the income is reported correctly, even if you do not have to pay taxes on it.

Talk to Your Attorney About Your Compensation Options and Potential Taxes

Sometimes, people with mesothelioma or their families are evaluating different compensation scenarios with their attorney. Families should ask questions about the tax implications of each option. Understanding what will be taxed and at what rate can help families choose the compensation option that is best for them. Our team of attorneys can help you understand tax implications and assist you in filing your mesothelioma claim.

Contact a Mesothelioma Lawyer Today

If you were diagnosed with mesothelioma, you may qualify for a settlement, VA disability benefits, or other financial support. Call us today at (585) 496-2648 to schedule a free case evaluation with our office. King Law can help you secure a mesothelioma settlement, protect your legal rights, and help you understand how your payout may be taxed. If you lost a loved one to mesothelioma, call us. You may be entitled to wrongful death compensation.

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