Structured Settlement Tax Rules: What Sellers Need to Know (2026)

If you are thinking about selling your structured settlement, one of the first questions is whether you will owe taxes on the lump sum. The short answer for most sellers is no. Structured settlement payments from personal physical injury cases are tax-free under federal law, and that tax-free status carries through when you sell your payments for a lump sum. Federal law also imposes a 40% excise tax on any buyer who skips the court approval process, which is why every legitimate transfer goes through a state court. Below, we break down the federal tax rules that apply to structured settlement sales and explain how they protect you.

Are Structured Settlement Payments Tax-Free?

Structured settlement payments from personal physical injury cases are excluded from federal income tax under IRC § 104(a)(2).

This exclusion has been in the tax code in various forms since 1918 and was expanded by the Periodic Payment Settlement Act of 1982. The IRS provides guidance on this exclusion in Publication 4345 (Settlements, Taxability). The key principle is straightforward: if someone is injured and receives compensation, taxing that compensation would reduce the amount available to cover medical expenses, lost wages, and diminished quality of life. The exclusion applies to the periodic payments themselves and to the investment growth inside the annuity funding those payments.

Not every structured settlement is tax-free. Settlements from employment discrimination claims, emotional distress without physical injury, punitive damages, or other non-physical-injury claims may be taxable. If your settlement falls into one of these categories, the payments were likely taxable when you received them, and selling them does not change that.

Does Selling Your Payments Change Your Tax Status?

No. Under 26 U.S.C. § 5891(d), the tax treatment of your original structured settlement is preserved after a factoring transaction.

This is one of the most important protections in the statute. If your structured settlement payments were tax-free under IRC § 104(a)(2) when the settlement was established, selling those payments for a lump sum does not convert tax-free income into taxable income. The statute explicitly says that if the applicable requirements of §§ 72, 104(a)(1), 104(a)(2), 130, and 461(h) were satisfied at the time the settlement was entered into, "the subsequent occurrence of a structured settlement factoring transaction shall not affect the application of the provisions of such sections."

In other words, the IRS does not penalize you for selling. Your tax-free status survives the sale.

The 40% Federal Excise Tax on Buyers (26 U.S.C. § 5891)

Federal law imposes a 40% excise tax on any person who acquires structured settlement payment rights without a court-approved "qualified order."

This tax was enacted in 2002 as part of the Victims of Terrorism Tax Relief Act. Representative Clay Shaw, who introduced the legislation, described it as part of "a single overall package of complementary Federal and State legislation" designed to protect the congressional policy behind structured settlements while allowing legitimate factoring to proceed under court supervision.

The tax base is the "factoring discount," defined as the difference between the face value of the payments being acquired and the amount the buyer actually pays. On a transaction where a buyer pays $65,000 for $100,000 in future payments, the factoring discount is $35,000, and the excise tax would be $14,000 (40% of $35,000). That penalty is large enough that no legitimate buyer would proceed without court approval.

The excise tax falls entirely on the buyer. You do not owe it. CSF obtains a qualified order on every transaction, which means the excise tax never applies.

What Is a "Qualified Order"?

A qualified order is a final court order from a state court acting under the state's Structured Settlement Protection Act that finds the transfer does not violate any law and is in your best interest.

The order must come from a court in the state where you live. If your state does not have an SSPA (every state does now), the statute allows a court in the state where the annuity issuer or assignment company is located. The Ninth Circuit called this court approval process the "cornerstone" of both state and federal law in this area.

The IRS takes the qualified order requirement seriously. In its 2019 Audit Technique Guide for structured settlement factoring transactions, the IRS illustrates that a court approval from the wrong state does not count. A Washington state court order is not a "qualified order" for a payee who lives in North Carolina if North Carolina has its own SSPA. The order must come from the right court under the right statute.

CSF files every petition in the correct court under the correct state SSPA. Our attorneys handle the filings, the notice requirements, and the hearing logistics. You do not need to figure out which court or which statute applies to your situation.

Why Court Approval Exists: The Conflict of Interest Problem

The court approval requirement is not a formality. It exists because some companies have taken advantage of sellers who did not have an independent judge reviewing the deal.

In a 2024 case decided by the Ninth Circuit, approximately 2,000 structured settlement payees sued their annuity issuer for inducing them into factoring transactions. The company was both the issuer making the periodic payments and the buyer purchasing those payments back at a discount. The payees alleged that the company used its position of trust to solicit them into selling at steep rates. One plaintiff sold $695,000 in life-contingent payments for just $18,609.

State courts had approved each of those transactions as being in the payees' best interest. The Ninth Circuit did not reach the merits of the fraud claims, but the case illustrates why the identity of your buyer matters. When the company buying your payments is the same company issuing them, the dynamic is different from working with an independent third-party buyer.

CSF is an independent buyer. We do not issue the annuities we purchase. We have no pre-existing relationship with you. When a judge reviews a CSF transaction, the court is evaluating a deal between you and a company whose only interest is offering a competitive price for your payment stream. That is how the system is supposed to work.

Have questions about the tax treatment of your structured settlement? Call us at (800) 317-3769. We can walk you through the basics and recommend that you consult a tax professional about your specific situation. For more on the selling process, see our structured settlement hub page or our step-by-step selling guide. If you are in California, our California SSPA guide covers the state-specific requirements in detail.

Companies That Tried to Skip Court Approval

Federal courts have permanently shut down attempts by factoring companies to bypass the state court process.

In Symetra Life Insurance Co. v. Rapid Settlements, Ltd. (S.D. Tex. 2009, affirmed by the Fifth Circuit in 2014), a factoring company used arbitration to transfer structured settlement payment rights without going through the state SSPA process. The court permanently enjoined the practice. The Third Circuit reached the same result in Allstate Settlement Corp. v. Rapid Settlements, Ltd. (2009), affirming an injunction against using arbitration to circumvent the Pennsylvania SSPA.

More recently, in CBC Settlement Funding, LLC v. Everlake Assignment Company (S.D.N.Y. 2025), a federal court held that § 5891 does not give federal courts the authority to approve structured settlement transfers. The statute requires state court approval under state law. A federal court order cannot substitute.

These rulings confirm that the court approval process cannot be worked around. Every legitimate structured settlement transfer goes through a state court, and every qualified order must satisfy the specific requirements of the applicable state SSPA. This is a feature, not a bug. It protects you.

Frequently Asked Questions

Is selling a structured settlement taxable?

If your structured settlement was for personal physical injuries, the lump sum is generally tax-free under IRC 104(a)(2). The tax-free status carries through the sale. Non-physical-injury settlements may be taxable.

What is the 40% excise tax on structured settlement transactions?

Under 26 U.S.C. 5891, a buyer who acquires payment rights without court approval must pay a 40% excise tax on the factoring discount. The tax falls on the buyer, not the seller. Court approval through a qualified order avoids it.

Does the buyer or the seller pay the excise tax?

The buyer pays. You do not owe any excise tax when selling your structured settlement. The buyer avoids it by obtaining court approval under the state SSPA.

Can a structured settlement transfer be done through arbitration?

No. Federal courts have permanently enjoined factoring companies that tried to use arbitration to bypass state court approval. The Fifth and Third Circuits both affirmed injunctions against this practice.

What happens to my tax-free status after I sell?

Under 26 U.S.C. 5891(d), your tax-free status is preserved. Selling does not retroactively change the tax treatment of your settlement for you or any other party.

Are workers compensation settlements taxable when sold?

Workers comp payments are tax-free under IRC 104(a)(1), and that treatment generally carries through a court-approved sale. Not all states allow workers comp structured settlements to be transferred.