When people are involved in lawsuits, particularly those that could lead to a significant payout, they want to know whether or not their settlement or award will be taxable. After all, people need to know how much of the money they are awarded will actually be theirs to spend, and how much of it will go to the government. Since the more money people have, the more taxes they pay, this could take a significant chunk out of any settlement or verdict.
Fortunately, while taxation on settlement is complex, most of these settlements are free of tax, to a certain degree.
“Generally wrongful death and survivors’ actions settlements are both free of tax consequences. I would add that any amount of money that might be construed to be punitive or exemplary damages, or payment for confidentiality will be taxable.”
The reality is that taxation is incredibly complex, and understanding what to and what not to pay tax on is perhaps the most complicated of all. There are a number of factors that actually determine whether you will have to pay tax on the money you are awarded during a settlement. Some of the rules have been explained in simple terms by MSN Money’s Jeff Schnepper.
“Jeff Schnepper of MSN Money points out the “personal physical injuries or physical sickness” requirement of the statute. Serious physical injuries like broken bones and herniated discs would qualify under this statute. Less serious injuries like muscle strains, cuts and bruises would also qualify. The IRS training manual for lawsuits and settlements provides that individuals suffering only emotional, as opposed to physical, injuries can only exclude from income their verified out-of-pocket expenses associated with the emotional injury.”
To illustrate, if someone is awarded damages for sustaining an injury at work that led to wrongful termination, that person will not have to pay tax on the damages for the injury, but will have to pay tax on the damages for wrongful termination.
More specifically, two requirements have to be made in order for a financial award at verdict or settlement to be free of tax. The first, as explained, is that the award has to be in relation to some form of physical injury. Here, illnesses are classed as physical injury. If this is not present, then your award will be taxed.
The second element is that at the heart of the injury lies a wrongful or negligent act of the other party. This means that they must have done something, or failed to do something, and that this action or inaction is directly responsible for your injury. Hence, if you had an injury during a dispute, such as you tripping over during an argument, you will have to pay tax on your award. If, however, someone pushed you over during an argument and this caused your injury, then the award will be tax free.
So far, so complicated! Unfortunately, it gets more complex still. Most people, in a mesothelioma lawsuit, will be awarded punitive damages.
“Punitive damages are awarded in addition to actual damages in certain circumstances. Punitive damages are considered punishment and are awarded when the defendant’s behavior is found to be especially harmful, but are normally not awarded in the context of a breach of contract claim.”
Regardless of why the punitive damages were awarded, they are always taxable. Citizens of this country are taxed on both their income and on punitive damages. This is done because a punitive damage doesn’t provide compensation for money that the defendant lost, either by having to spend it or not being able to earn it. As such, they are classed as above and beyond whatever award would return the victim to a normal state of life.
Then, there is emotional distress, which mesothelioma patients, or their survivors, are also often awarded for.
“An increasingly popular basis for a claim of damages in lawsuits for injury due to the negligence or intentional acts of another. Originally damages for emotional distress were only awardable in conjunction with damages for actual physical harm. Recently courts in many states, including New York and California, have recognized a right to an award of money damages for emotional distress without physical injury or contact.”
Emotional distress, by definition, isn’t a physical injury. Hence, even if you became so distressed that you became ill, the award for emotional distress will remain taxable. However, if the emotional distress has a clear link to a physical injury, it becomes tax free. So, if you received a mesothelioma diagnosis, and this left you distressed, as it would, you would not have to pay tax on it. If you are filing for wrongful termination, and losing your job means you became emotionally distressed, you will have to be taxed.
The most complicated issue actually lies in the emotional distress element. For those who are distressed because their loved one was diagnosed with mesothelioma, or died as a consequence of the illness, it may or may not be taxable.
Last but not least, any awards for lost wages are taxable.
Get Your Mesothelioma Settlement Now
If you or someone you love has been exposed to asbestos and now face a condition such as Mesothelioma or lung cancer, contact us immediately to speak with a specialist who will help guide you through your options, both legally from a compensation standpoint and medically should you have questions.While the process sounds daunting, getting started is easy.