Do you have to pay taxes on a structured settlement?

If a structured settlement is sold in exchange for a lump sum, those funds are generally not taxable. By law, in most cases, the IRS cannot tax revenues from a structured settlement, regardless of whether they are paid in a series of payments or in a single lump sum. The policy behind this law is that structured agreements are intended to provide financial stability and security to beneficiaries. However, it should be clear that several taxes come into play with respect to specific types of structured settlement transfers.

Almost all structured insurance settlements are completely tax-free. This includes federal state taxes %26, taxes on interest, dividends and capital gains, and the AMT. The reason for this is that the government believes that receiving compensation for physical injury, wrongful death, or workers' compensation is not an income gain. It is a restoration of the state before the loss.

A structured settlement annuity (“structured settlement”) allows a claimant to receive all or part of a settlement for personal injury, wrongful death, or workers' compensation in a series of periodic income tax-free payments. If someone wants to sell a structured insurance agreement, which is usually done to receive the remaining lump sum, that money is also not taxable until the original contract is modified. The decision to use a structured settlement must be made before finalizing the settlement agreement. If someone wants to give away their structured settlement, they also have to keep the original terms in place.

You will not pay tax on structured settlement payments awarded as compensation in personal injury or workers' compensation claims. This means that prizes derived from discrimination, mental distress and injury to personal reputation can be taxed by the IRS. Even if you already have a structure, you may not know how they work and why they are configured the way they are. However, if a structured insurance agreement involves money that would have been taxed under normal circumstances, such as a late payment agreement, divorce payments, punitive damages, lottery prizes, or liquidation damages, then it would be treated as normal income.

In other words, the money in your settlement is only excluded from your tax liability as long as it is maintained and paid out of the annuity or Treasury bond financed by the defendant at the time of the settlement agreement. Congress passed the Periodic Payment Settlement Act of 1982 to encourage the use of structured settlements in cases involving physical injury and wrongful death. Although a payee has the ability to sell annuity payment rights for most types of annuities (excluding certain accounts, such as annuities in IRAs), the payee has to pay income taxes. Tax laws governing structured agreements were enacted to encourage the use of structured settlements in personal injury cases because they benefit the injured party, as well as the federal and state governments.

These have been around for more than a decade and are common in taxable cases, such as employment agreements. The payer has a better chance of paying over time, and the recipient doesn't have to deal with the stress of receiving a large amount of money in one go. At any time where the source of the claim is based on personal physical injury, the principal amount of the settlement for the customer will be exempt from tax. When it comes to settlement plans, lawyers and clients are most likely familiar with a structured agreement.


Minnie Wuestenberg
Minnie Wuestenberg

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