Is a Structured Settlement Considered Taxable Income?
Even if a structured settlement generates interest over time, the payments are not considered income for taxation purposes. Click below for more information.
Understanding Taxation of Structured Settlements
The portion of your settlement that represents lost wages will be taxable. Consulting with your attorney is essential to understand how your settlement is structured.
Taxation in the United States
Assuming you are discussing U.S. taxes, it is important to note that the nature of a structured settlement versus a lump sum does not directly impact the taxation. What matters is the underlying claim that gives rise to the settlement. Damages for personal physical injuries, including medical expenses for treatment of those injuries, are not taxable. Everything else, including interest included in periodic payments, is taxable.
So, damages for personal physical injuries that are part of a structured settlement are generally not taxable. However, interest or gains on these payments are considered taxable. This means that while the principal amount of the settlement is exempt, any investment earnings from interest or bonuses are taxable.
The Benefits of a Structured Settlement
No, a structured settlement is not entirely tax-free. It is one of the many benefits of agreeing on a structured settlement instead of a lump sum award, which IS taxable. Parts of the structured settlement, such as attorney fees, punitive damages, and any other immediate payouts, are taxable. These are complex non-trial agreements that require the involvement of qualified lawyers, economists, financial planners, and life insurance brokers. Do not attempt to negotiate agreements of this nature by yourself!
Contact your bank for assistance, as they can provide you with detailed guidance on managing your structured settlement payments and understanding the tax implications.
Clarifying the Law
According to Internal Revenue Code §104a2 and §130c, the full amount of any received on account of personal physical injuries through a qualified structured settlement annuity is exempt from taxation. However, the investment earnings on a lump sum payment are generally subject to taxation.
I am speaking broadly and specifically regarding Federal Tax Laws. If your structured settlement is related to an injury case, the main payments are usually exempt from taxes. Any interest or gains on these payments are taxable. Local and state laws may vary significantly depending on your location and the specifics of the structured settlement.
For detailed guidance, consult a tax professional or a legal advisor. Understanding and navigating the tax implications of a structured settlement is crucial for planning your financial future.