Structured settlements are tax-free financial vehicles used to compensate for personal injuries and losses. However, there are a few exceptions to the rule that could incur tax liabilities.
Unlike some financial investments, structured settlements for personal injuries usually have no tax implications. Structured Settlements for wage and other non personal injuries typically have tax implications.
Punitive damages, also referred to as exemplary damages, are damages a defendant may be ordered to pay for reckless or negligent behavior. Though they can be awarded in personal injury cases, punitive damages are not paid to compensate for an actual injury. Instead, this monetary reward is seen as a punishment to the defendant for causing you harm as the claimant.
Since this award is not meant to make up for your health or meant to contribute toward medical expenses, any income received from punitive damages is considered taxable.
Each situation is unique. For specific tax implications from your settlement always consult a CPA or tax attorney.
Lottery Structured Settlements
Lottery winnings do not have the same benefits as personal injury structured settlements. Lottery winnings are taxed in two different ways depending on how you receive them.
If you receive a lump sum payment, all of the income received is taxable. It will be subject to federal and state taxes at one time. Then you can spend or invest the money as you see fit.
If you receive periodic payments from a lottery structured settlement, each payment is subject to current federal and state taxes. The advantage of receiving a structured settlement over a lump sum payment is that taxes are paid gradually.
Workers’ Compensation Exceptions
Workers’ compensation is paid if you get injured or sick as a result of your work. Workplace damages are not considered taxable income, specifically if awarded amounts contribute toward medical bills.
However, if you receive a settlement to supplement lost income from a work-related injury, you will have to pay taxes on payments. In addition, if you receive a workplace settlement from a discrimination or slander case, your payments will be viewed as taxable income.
A portion of your workers’ compensation benefits may also be taxable if combined with Social Security income or other supplemental Social Security benefits.
Selling Your Structured Settlement
Just as personal injury settlements are not seen as taxable income, so are the future sales of these payments as long as the contract terms do not change. However, all structured settlements that fall outside of personal injury can be taxed, including the sale.
You can choose to sell all or a portion of your payments, but at a discounted rate in exchange for immediate access to your cash. Unlike more common structured settlements, not all lottery winnings can be sold. If you choose to sell your lottery structured settlement, you must first ensure that it can be sold. Some lottery settlements require court approval in order to be sold to ensure the transaction is at the winner’s best interest.
- FindLaw. (n.d.). Structured Settlements: Pros and Cons. Retrieved from http://injury.findlaw.com/accident-injury-law/structured-settlements-pro-s-and-cons.html
- FindLaw. (n.d.). Are Workers’ Compensation Benefits Taxable? Retrieved from http://injury.findlaw.com/workers-compensation/are-workers-compensation-benefits-taxable.html
- Kidman, T. (2016, April 5). 4 Common Tax Questions on Structured Settlements. Retrieved from https://www.accountingweb.com/community/blogs/tilly-kidman/4-common-tax-questions-on-structured-settlements
- Swedroe, L. (2011, November 7). Some structured settlements may offer significant advantages. Retrieved from https://www.cbsnews.com/news/some-structured-settlements-may-offer-significant-advantages/
- Wood, R. W. (2012, May 23). What’s A “Structured Settlement”? Retrieved from https://www.forbes.com/sites/robertwood/2010/10/26/whats-a-structured-settlement/#28e132824422