Any settlements covering mesothelioma treatment and care are not considered taxable. Therefore, the IRS will not tax settlement amounts allocated for physical injuries or conditions like mesothelioma. Compensatory damages for medical costs or pain and suffering related to physical injuries are not taxed. It also includes rewarding lost income if you’re not of retirement age.
The 1996 Small Business Job Protection Act amended IRS Section 104 of the tax code to ensure compensation directly related to a personal injury is not taxable.
It is important to maximize settlements to ensure you have the most financial support possible following a mesothelioma diagnosis. Consult an experienced mesothelioma attorney now to learn about the process and your options.
What Part of a Settlement May Be Taxed?
- Punitive Damages – You will be taxed for punitive damages. These damages are sometimes awarded to punish parties whose conduct was too egregious to ignore. The damages are designed to deter any future behavior along these lines.
- Interest Income – You may also get taxed on the interest (interest income) if you place the settlement amount into a bank account and it accrues interest.
Minimizing Your Tax and Keeping Compliant: 4 Important Tax Tips for Mesothelioma Claimants
To minimize potential tax implications:
- Work with your mesothelioma lawyer to allocate the settlement among different categories of damages in the settlement agreement. This is important to ensure you are not taxed on portions of a settlement that should be protected from taxation.
- Consult a tax professional who has experience with personal injury settlements to understand your tax obligations and plan accordingly.
- Keep detailed records of all medical expenses and other costs related to your mesothelioma diagnosis and treatment.
- Be aware that receiving a large settlement can affect your tax bracket or eligibility for certain deductions or credits.
Tax law is complex and subject to change. That’s why obtaining both legal and tax advice is imperative. Professionals in these fields can help you understand your responsibilities and develop strategies to minimize tax burdens while ensuring compliance.
Types of Compensation in Mesothelioma Cases
Mesothelioma lawsuits can result in various types of compensation – some of which may have different tax implications:
Economic Damages
These damages compensate for financial losses related to the mesothelioma diagnosis, including:
- Medical expenses (past and future)
- Lost income
- Loss of earning capacity
- Travel expenses for treatment
- Home health care costs
Non-Economic Damages
These damages cover losses that are based on the severity of the illness and include:
- Pain and suffering
- Emotional distress
- Loss of enjoyment of life
- Loss of consortium (impact on spousal relationship)
Punitive Damages
In some cases, the court may award punitive damages to punish the defendant for extremely damaging conduct to prevent similar problems in the future.
Structuring Settlements for Tax Efficiency
Lump Sum vs. Structured Settlements
When negotiating a settlement, you may have the option to receive your compensation as a lump sum or as a structured settlement with payments over time. Each approach has potential tax implications:
- Lump Sum: Provides immediate access to funds but may result in a higher tax burden in the year received. It may cause you to fall into a higher tax bracket.
- Structured Settlement: Can spread out the tax burden over time and potentially keep you in a lower tax bracket.
Documentation and Reporting
It’s critical that your settlement agreement clearly allocates the compensation among different categories (e.g., medical expenses, pain and suffering, lost income). This allocation can significantly impact the tax treatment of your settlement award.
If your settlement is for physical injuries or sickness and you have not taken an itemized deduction for medical costs for your illness before your award, the whole amount is tax-free.
However, if you deduct medical expenses in prior years, where the deductions reaped you a tax benefit, these medical costs must be allocated as income on a pro-rata basis for the applicable years.
IRS Forms for Reporting a Settlement
Depending on the nature of your settlement, you may receive various IRS forms reporting any income, such as:
- Form 1099-MISC for taxable settlement amounts
- Form W-2 for lost income paid through an employer
Tax Return Reporting for Taxable Income
You’ll need to report taxable portions of your settlement on your tax return. Depending on the nature of the income, this may involve reporting on various schedules (e.g., Schedule 1 for other income).
Impact on Government Benefits
Receiving a substantial settlement may affect your eligibility for certain government benefits, such as Medicaid or Supplemental Security Income (SSI). It’s crucial to consider these potential impacts when structuring your settlement.
Estate Planning
If your settlement is substantial, it may have implications for your estate plan. Consider consulting an attorney to discuss options for protecting and distributing your assets.
Investment Considerations
If you receive a lump sum settlement, you must consider how to invest or manage these funds. Working with a financial advisor can help ensure your settlement provides long-term financial security and relief.
Timeline Expectations
The time from filing a mesothelioma lawsuit to receiving compensation can vary widely, typically from several months to a few years. Factors affecting the timeline include:
- Complexity of the case
- Number of defendants
- Court schedules
- Whether the case settles or goes to trial
- Potential appeals
It’s vital to discuss timeline expectations with your attorney and plan accordingly.
Contact a Mesothelioma Lawyer About Your Mesothelioma Case Now
If you’ve received a mesothelioma diagnosis, you need to contact a mesothelioma attorney at Vogelzang Law immediately. Learn more about your rights and ensure you’re financially covered for medical care, everyday needs, and obligations.
