Is it true that structured settlements are tax-free?A: Structured settlement payments resulting from personal physical injuries, physical sickness, or workers' compensation cases are tax-free under Section 104(a)(2) of the Internal Revenue Code. This tax exemption applies to the payments' principal and interest components.
However, certain situations may lead to taxable structured settlement payments, such as:
Emotional distress or mental anguish not associated with a physical injury or sickness: In this case, the structured settlement payments may be considered taxable income.
Punitive damages: If the structured settlement includes payments for punitive damages intended to punish the defendant rather than compensate the plaintiff, these payments are typically taxable.
It is important for you to consult with a tax professional or attorney to understand the specific tax implications of your structured settlement based on your circumstances.