If you have been or anticipate being awarded a structured settlement, then you might be wondering if your scheduled payments count as income for tax purposes. We are not tax advisors and you should talk with a tax advisor to get an answer, but in most cases a structured settlement is not considered income. Section 130 of the Internal Revenue Code exempts certain proceeds from personal injury settlements from income tax.
If you receive a settlement for personal physical injuries or sickness and did not take an itemized deduction for medical expenses related to the injury or sickness in prior years, the full amount is not taxable. The same is true if you receive a settlement for emotional distress or mental anguish originating from either physical injuries or sickness.
The IRS states "Generally, the IRS will not disturb an allocation if it is consistent with the substance of the settled claims." (source: https://www.irs.gov/pub/irs-pdf/p4345.pdf)
There are some exceptions and there the IRS created a 2 page publication which is provides great information on Settlements Taxability.
In the case that you die before the total amount is paid out, any beneficiary you have will also be exempt from reporting the scheduled payments as income (source: patrickfarber.com). Also in most cases, if you sell a tax exempt structured settlement to a factoring company, the payment from that sale will remain tax-exempt (source: www.annuity.org).
Every case is of course different and a settlement may be comprised of multiple elements, some of which could be completely tax free, while others could be taxed as income.
If you have questions about taxes on your structured settlement you should consult with a tax attorney or advisor.