The key tax advantage of a structured settlement is that the entire periodic payment stream — both the principal return and the interest/growth component — is tax-exempt under IRC §104(a)(2) and §130. By contrast, if you take a lump sum and invest it, the investment returns are taxable.
TL;DR.
Structured payments: fully tax-exempt (principal + return). Lump sum invested: principal exempt, investment returns taxable. The tax advantage grows with time and total amount. Selling/factoring a structure may create a taxable event.
Tax comparison: structure vs lump sum
| Component | Structured settlement | Lump sum + investment |
|---|---|---|
| Settlement principal | Tax-exempt | Tax-exempt |
| Growth / return component | Tax-exempt | Taxable (income tax on interest, dividends, gains) |
| Flexibility | Fixed schedule | Full flexibility |
Frequently asked questions
Why are structured settlement payments tax-exempt?
Under IRC §104(a)(2), damages for physical injury are exempt from federal income tax. IRC §130 extends this exemption to the qualified assignment — meaning the annuity company's payments to the claimant retain the tax-exempt status of the original settlement. The entire payment stream (both principal and interest/return component) is exempt.
What happens if I sell my structured settlement?
Selling (factoring) your structured settlement can result in the proceeds being taxable if the sale does not meet the requirements of IRC §5891. State laws also impose consumer protections and court approval requirements for structured settlement transfers.
Sources
- IRC §104(a)(2) — personal injury damages exclusion
- IRC §130 — qualified assignments
- IRC §5891 — structured settlement factoring transactions
Editorial note. This guide explains tax treatment. It is not tax advice. See our full disclaimer.
📌Cite this article: “Structured Settlements and Tax Treatment.” MyClaimWorth.com, May 2026. https://myclaimworth.com/articles/structured-settlements-tax-treatment