by John Darer CLU ChFC MSSC CeFT RSP CLTC
Courts do not set up structured settlements. Therefore a Court does not have to set up a structured settlement to avoid taxes
Don’t get Verklempt! Structured settlements are tax exempt for payment of damages under IRC Sections 104, 130 and 139F. Court approval is not necessary for the tax exemption
In certain situations, a court must approve a settlement, whether or not it involves a structured settlement. Below are some examples where court approval is typically necessary:
- Settlements involving payments to minors
- Settlements involving payments to incompetents
- Wrongful death settlements
Damages are a sum of money paid as compensation for a loss or an injury. It is the type of damages that govern the taxation.
These types of damages are tax exempt:
Internal Revenue Code Section 104(a)
(1)
amounts received under workmen’s compensation acts as compensation for personal injuries or sickness;
(2)
the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as perioidic payments) on account of personal physical injuries or physical sickness;
Internal Revenue Code Section 139F
(a) In the case of any wrongfully incarcerated individual, gross income shall not include any civil damages, restitution, or other monetary award (including compensatory or statutory damages and restitution imposed in a criminal matter) relating to the incarceration of such individual for the covered offense for which such individual was convicted.
Last updated November 10, 2025