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How Do Structured Settlements Affect Taxes?

Structured settlements can be complicated, and each one is different, resulting in many questions regarding them. One of the most common questions is "Are structured settlements taxable?" Like most legal and financial arrangements, this question does not have a simple yes or no answer. Taxation of structured settlements depends on a number of factors, and you should be sure to consult a qualified attorney and/or accountant to make sure you fully understand your specific situation. This answer will broadly describe things that do and don't affect the taxable status of your structured settlement.

Factors that Don't Affect Your Structured Settlement Taxation

There are a number of things that don't affect if your structured settlement is taxable. These include:

  • Funding by a structured settlement funding company
  • Length of the payment schedule
  • Insurance status of the settlement

This is good to know because with all the different moving parts that a structured settlement can have, knowing what you don't have to worry about is almost as important as knowing what you do have to consider.

Factors that Can Affect the Tax Status of Your Structured Settlement

There are also a number of factors that will affect that taxable status of your structured settlement. One of the major factors is the reason you're receiving the settlement. A personal injury structured settlement is generally safe from taxation, because the payment results from injury. However structured settlements that result from discrimination cases designed to make up for lost wages or that include punitive damages are subject to tax. Another thing that can affect taxation of a structured settlement is the structured settlement rates. At certain rates some of your structured settlement may be taxable. You should talk to a lawyer to understand what those rates are for your specific situation and understand how they affect your structured settlement. Another important thing to consider when it comes to taxes and structured settlements are structured settlement sales. A structured settlement sale is a different kind of transaction than your structured settlement payments, and so it may be subject to a higher level of taxes than your structured settlement would be. This makes the tax implications of selling your structured settlement an important consideration when you are deciding if selling your structured settlement is right for you. A qualified financial advisor or planner can help you better understand all the financial implications of selling a structured settlement, so it is important to consult one if that's a course of action you're considering.