Are Structured Settlements taxed?

Are Structured Settlements Taxed?

Mostly all Structured Settlements are completely free from taxation. The reason for this is that the government does not recognize receiving compensation for a physical injury, wrongful death, or from worker's compensation as a gain in income. Instead, the government views it as an indemnification, or a restoration to the state prior to the loss.

In addition, there are many different applications of Structured Settlements that fall outside of those parameters. However, instead of allowing tax-free benefits, one can take advantage of tax-deferral through the use of the Structured Settlement vehicle.

How are Structured Settlements Tax-Free?

In 1982, a bipartisan coalition of legislators in Congress came together to pass legislation that amended the federal tax code. Their action, The Periodic Payment Settlement Act of 1982 (Public Law 97-473), formally recognized and encouraged the use of structured settlements. Internal Revenue Code §104(a)(2) and §130(c) clarify that the full amount of any received on account of a personal physical injury through a qualified structured settlement annuity is exempt from taxation when received (by contrast, the investment earnings on a lump sum payment are generally subject to taxation).