In most cases, no. Under federal tax law, money you receive as compensation for a physical injury or physical sickness is generally excluded from your taxable income, and that rule covers most of what a mesothelioma settlement or verdict pays. Arizona's income tax return starts from your federal adjusted gross income, so compensation that is excluded federally is generally not picked up by the state either. Some pieces of an award can still be taxed, which is why the way your settlement is written and allocated matters more than most families expect.

At Throneberry Law Group, we handle Arizona mesothelioma settlements and trust fund claims for clients in Phoenix, Tucson, and across the state, and the tax question comes up in almost every case. Michael Throneberry has litigated asbestos cases for about two decades, and he lost his own father-in-law to mesothelioma, so we know families want to understand what they can keep before they sign anything. We walk through the allocation with you and encourage you to confirm the details with a tax professional.

Which Parts of a Mesothelioma Settlement Are Not Taxed

Compensatory damages paid because of a personal physical injury or physical sickness are generally excludable from gross income under Section 104(a)(2) of the Internal Revenue Code. The IRS confirms this position in its guidance on the tax implications of settlements and judgments, updated in October 2026. The exclusion generally covers money paid for medical bills, pain and suffering, and even lost wages when they flow from the physical illness. Our page on the damages available in asbestos claims describes each of those categories.

Asbestos trust fund payments connected to a physical illness are generally treated the same way as lawsuit compensation. The classification of each payment still matters, which is one reason we review every offer and settlement document with the client before it is accepted, including each asbestos trust fund claim we file.

Which Parts of a Mesothelioma Award Could Be Taxable

Not every dollar fits inside the physical injury exclusion. A few categories are treated differently, and they can show up in a mesothelioma case.

• Punitive damages: These punish a defendant for especially wrongful conduct rather than compensate you for an injury. The IRS treats them as taxable income, with a narrow exception for some wrongful death awards in states where only punitive damages are available.
• Interest: If a judgment earns interest while an appeal plays out, or a payment is made in installments with interest, that interest is generally taxable income even when the underlying damages are not.
• Previously deducted medical expenses: If you deducted medical costs on an earlier return and a settlement later reimburses them, part of that reimbursement can be taxable, but only to the extent the earlier deduction actually reduced your taxes.

Because the allocation in the settlement agreement drives all of this, how a case is resolved can change the tax result. When we negotiate on your behalf, we pay attention to how each component is described in the written agreement, and we cover what else to look at in our post on what to consider before accepting a mesothelioma settlement.

How Does Arizona Treat a Mesothelioma Settlement

Arizona does not have a separate rule for injury settlements. The Arizona Department of Revenue explains that the starting point for the Arizona individual income tax return is your federal adjusted gross income. In practice, that means compensation the federal rules exclude is generally not added back on the Arizona return, and the parts that are federally taxable, such as punitive damages or interest, generally flow through to the state as well.

State law changes and individual situations differ, so confirm your own return with a tax professional who has the settlement paperwork in front of them. We are glad to speak with your advisor directly.

Are Wrongful Death Settlements Taxable

Families who lose someone to mesothelioma may bring a wrongful death claim, and our post on who can file a mesothelioma wrongful death claim in Arizona explains who has that right. Compensation for a death caused by a physical illness is generally treated like other physical injury damages, so most of it is not taxed. Any interest and any punitive portion may be treated as income, subject to the wrongful death exception noted above.

Before you file a return, read the settlement documents and identify how each payment is labeled. Keep records of your medical expenses and any interest you received, and if the case involved several defendants or different categories of damages, ask us to walk you through the allocation.

Arizona Mesothelioma Lawyers at Throneberry Law Group

Knowing what you can keep is part of knowing what a case is worth. We explain the tax treatment of each component of a recovery as we negotiate it, and we coordinate with your tax advisor so there are no surprises after the money arrives. Michael Throneberry has handled asbestos cases for Arizona families for about two decades, and we serve Spanish-speaking clients as well.

If you or a family member in Arizona has been diagnosed with mesothelioma, we can review your exposure history, identify every source of compensation, and answer the questions that keep you up at night. There is no fee unless we recover for you. Tell us about your diagnosis through our contact form.