Are Structured Settlements Taxable?

Sarah Chen

CFP

Updated May 2, 2026 16 min read

Key Takeaway

Most structured settlement payments are tax-free at the federal level. State tax laws vary and may affect your overall tax burden. Selling your settlement can have complex tax implications.

Federal Tax Treatment

Under current federal tax law, periodic payments from structured settlements resulting from personal physical injury or physical sickness are generally tax-free. This is one of the most significant advantages of choosing a structured settlement over a lump sum.

The tax-free status applies to the payments themselves, not to any investment earnings you might generate by investing those payments. If you invest your settlement payments, any interest, dividends, or capital gains would be taxable like any other investment income.

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Are structured settlement payments taxable?

Generally, no. Periodic payments from personal physical injury or physical sickness settlements are tax-free under federal law. This is one of the biggest advantages of structured settlements.

What if I sell my settlement for a lump sum?

The tax treatment can be complex. The portion representing damages for physical injury may remain tax-free, but other portions could be taxable. Consult a tax professional before selling.

Do I have to pay state taxes on my settlement?

State tax laws vary. Some states conform to federal tax treatment and don't tax structured settlement payments, while others may have different rules. Check your state's specific tax laws.