Is My USVSST Payment
Taxable?

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If you hold a judgment against Iran and have started receiving payments from the United States Victims of State Sponsored Terrorism Fund (USVSST Fund), one of the first questions is what you owe on it. These are heavy letters to open, so this page sticks to what the Fund's own materials and governing statute actually say, and it sends the tax math where it belongs, to a professional. Nothing here is tax advice.

Is it taxable? The honest answer is that it depends

There is no flat yes or no. How a USVSST payment is taxed depends on what the underlying money is made of, its character. By law, the amount the Fund distributes is measured only against the compensatory damages in your judgment, and the statute is explicit that compensatory damages leave out interest and punitive damages. Those interest and punitive amounts are generally treated as taxable when recovered, which is one reason a blanket tax-free label is wrong. The Fund does not decide the tax character of your payment for you, and it tells every claimant to take tax questions to a tax professional. Bring your award paperwork to a CPA and let them apply the rules to your specific award.

What the Fund's own materials say

The Fund does not answer the tax question for you. Its FAQ, under the heading “Will my award be subject to federal income taxes?”, reads:

“The Special Master recommends that you direct any tax-related questions to a tax professional. The USVSST Fund does not issue any IRS forms such as the IRS Form 1099.”

Source: USVSST Fund Frequently Asked Questions, FAQ 4.15.

Why there is no 1099, and what that does and does not mean

The Fund does not issue a 1099 or any other IRS form for your award, and it does not decide your tax reporting for you. It is worth being precise here, because two different things get confused: the Fund issuing no 1099 is not the same as the payment being tax-free.

You may still have a reporting obligation depending on the character of your award. The absence of a form does not remove that question, it simply means the paperwork and the judgment are the record, not a 1099. The correct move is to give your award documentation to a CPA and let them tell you what, if anything, is reportable and how.

What the Fund pays, and why interest and punitive damages are not in your check

Think of the payment in terms of the kind of dollars behind it.

• Interest and punitive damages: generally taxable. The statute defining the Fund says the term compensatory damages “does not include pre-judgment or post-judgment interest or punitive damages.” You keep your creditor rights to those unpaid interest and punitive amounts on your judgment, and when such amounts are recovered they are generally treated as taxable. This is a large part of why a blanket tax-free label does not hold up.
• Compensation for physical injury or death: generally excludable. As a general federal-income-tax principle, amounts that compensate for physical injury or physical sickness, or a wrongful death, are often excludable from income. That excludability comes from the tax code, not from any USVSST document, so treat it as a general starting point to confirm with your CPA, not a settled result for your particular award.

Because a single payment can trace back to dollars of different kinds, part may be excludable and part may not be. That is exactly why the Special Master routes all tax questions to a tax professional and issues no 1099, and why nobody should put a single label on the whole check.

How is this different from the VCF award?

The VCF (the September 11th Victim Compensation Fund) and the USVSST Fund are two different programs, with different money and different rules, and their tax treatment is handled by different authorities. As a general matter, VCF awards are treated as generally federal-income-tax-free, but that treatment comes from IRS guidance for 9/11-related payments, not from any USVSST document, so it should be confirmed.

Two cautions here. First, that is a general federal-income-tax statement only. It is not a promise your award is 100 percent tax-free, and it does not speak to state income tax or to estate tax, which are separate questions. Second, do not carry the VCF treatment over to your USVSST payment. Receiving one does not tell you how the other is taxed. Give your VCF award letter to your CPA and ask them to confirm the current federal treatment and check your state.

What should I do?

The practical steps are simple, even when the money is not.

1. Keep every award letter and any document that breaks down what your payment represents.
2. Give that breakdown to a CPA before you file, and ask them to apply the rules to the specific character of your award.
3. Ask directly about interest and punitive amounts versus compensation for injury or death, and about state tax, not just federal.
4. Do not act on a rumor that the whole payment is tax-free, and do not assume a missing 1099 settles anything.

After everything these payments represent, the last thing anyone should have to do is guess at the tax on them. Put a tax professional between you and the IRS before you file.

Sources

• 34 U.S.C. § 20144(j)(3), definition of “compensatory damages”: the term does not include pre-judgment or post-judgment interest or punitive damages.
• 34 U.S.C. § 20144(d)(5)(B), retained creditor rights: an applicant keeps creditor rights in any unpaid and outstanding amounts of the judgment, including interest or punitive damages.
• USVSST Fund, Frequently Asked Questions, FAQ 4.15, at usvsst.com: tax questions go to a tax professional, and the Fund issues no IRS Form 1099.
• General VCF federal-income-tax position: IRS Publication 3920 and IRC § 104 and § 139. These are IRS authorities, not USVSST documents, and are stated here as a general position to confirm with your tax professional.