by John Darer® CLU ChFC MSSC CeFT RSP CLTC Updated September 26, 2026
Following is a brief summary of the tax benefits of structured settlements in physical injury and non physical injury settlements.
Personal Physical Injury/Physical Sickness Including Wrongful Death)
Structured settlement payments that are payable as damages, within the meaning of IRC 104(a)(2) and IRC 130, are income tax free.Such damages payments are income tax free whether the qualified funding asset is a structured settlement annuity, treasury obligations or an indexed linked structured settlement payment [such as the offered by Pacific Life Insurance Company and Pacific Life and Annuity Company (in NY)]
Worker’s Compensation Claims (post -August 1997)
Structured settlement payments for amounts received under worker’s compensation acts for personal injuries or sickesss, within the meaning of IRC 104(a)(1) and IRC 130, are income tax free. Such payments are income tax free whether the qualified funding asset is a structured settlement annuity, treasury obligations or an indexed based or linked structured settlement payment [such as the Payout Plus offered by Pacific Life Insurance Company I-Structure and i-Structured Select by Independent Life Insurance Company and Income Advantage by The Prudential Insurance Company of America]
Wrongful Conviction/Wrongful Incarceration Settlements
Structured settlement payments that are payable as damages, within the meaning of IRC 139F, are income tax free. Note that since damages subject to the IRC 139F exclusion are not currently covered under IRC 130, the structured settlement transaction must be done as a non qualified assignment even though the payments will be income tax free.
Employment Settlements [Settlement of Claims for Wrongful Termination, Sexual Harassment, Failure to Promote, Gender , Ethnic or Sexual Orientation based lawsuits
Tax deferred structured settlement payments flowing from a properly drafted release and executed non qualified assignment provided tax breaks for the plaintiff make offers more attractive and there are advantages for both parties.
Long Term Disability Settlements
Tax deferred structured settlement payments flowing from a properly drafted release and executed non qualified assignment provided tax breaks for the plaintiff make offers more attractive and there are advantages for both parties.
Other Non Physical Injury or Physical Sickness Claim Settlements
Tax deferred structured settlement payments flowing from a properly drafted release and executed non qualified assignment provided tax breaks for the plaintiff make offers more attractive and there are advantages for both parties. By deferring compensation over time, plaintiff defers in three ways and effectively earns interest tax deferred on
- principal
- accumulating interest
- the taxes deferred in the year of settlement.
Punitive Damages
Lump sum settlements risk plaintiffs exceeding the Alternative Minimum Tax (AMT) threshold which can, in some cases, be mitigated by spreading the settlement payments over time.
Qualified or Non Qualified Assignment=Novation of Periodic Payment Liability
With a qualified assignment or a non qualified assignment the Defendant or its insurer receives a novation of the future payment obligation at the time the assignment is completed.
Care must be taken when the structured settlement is established to be sure there is a clear periodic payment obligation to assign. Weasel words should be avoided.