If you as the plaintiff wins or settles a personal injury lawsuit, you are entitled to a payment which is either offered as a lump-sum or a structured settlement.
Should you and the defendant settle on a structured settlement, you are set to receive the award as periodic payments over a fixed number of years, instead of taking a lump-sum.
Now most people often wonder whether structured settlements are eligible to be taxed or not. The answer is no.
In most states, these settlements are considered as a way to provide victims of accidents and injuries with long-term financial security. This makes this type of income tax-free. Whether the settlement gets paid in a one-time lump-sum or periodic payments, the state’s revenue body is forbidden from imposing tax on it.
However, there are certain scenarios that may impact taxes on structured settlements. Here is some good advice on structured settlements that are taxable and those that are tax-free.
# Personal Injury and Wrongful Death Settlements
All-lump-sum and periodic payments in structured settlements of personal injury and wrongful death claims are free from the state, federal, and local income taxes. This also includes the interest earned throughout the entire duration of payments.
# Worker’s Compensation Settlement Payments
As per the Worker’s Compensation Law, the victims of accidents, physical injuries, and cases of sickness that occur at the workplace are eligible to receive structured settlements.
Because damages from personal injury and sickness are not considered as income, this settlement is therefore not taxable. For example, if an employee ends up in a wheelchair as a result of injury at the workplace, these compensatory payments are not subject to tax.
The employee won’t also owe any income tax on money received to cover their medical bills and other related expenses.
# Punitive Damages Settlement Payments
If you win a personal injury lawsuit, you may also receive additional payments meant to punish the defendant for putting you in the situation you are in.
These payments are known as Punitive Damages. Unlike compensatory payments, punitive damages payments aren’t offered to make up for your injury or lost income, but rather to improve your financial position.
Therefore, as a part of your structured settlement, punitive damages payments are taxable.
# Emotional Damages Payments
Compensatory payments offered as a result of emotional damages in the workplace are taxable. For example, if you happen to win a slander or discrimination lawsuit at the workplace, the structured settlement payments you will receive will be taxed.
On the other hand, if you become sick as a result of emotional distress, the settlement you receive to cover hospital bills will be tax-free.
# Lottery Structured Settlement
You can also choose to receive your lottery winnings in form of a structured settlement.
All your lottery winnings are taxable. It doesn’t matter whether you take the payments as a one-time lump-sum or as periodic payments.