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A structured settlement is an arrangement in which the settlement payment is paid out over time, rather than in a lump sum. This can help to avoid taxes on the settlement payment by spreading out the tax liability over a longer period of time.

The general rule regarding taxability of amounts received from settlement of lawsuits and other legal remedies is Internal Revenue Code (IRC) Section 61. This section states all income is taxable from whatever source derived, unless exempted by another section of the code.

Allocate damages to reduce taxes: During settlement negotiations, you can negotiate to allocate a larger portion of the settlement to non-taxable award categories. For example, increase the award related to physical injuries and illness and decrease amounts related to emotional distress.

The settlement statement should clearly show the charges and credits for both the buyer and the seller. You should calculate and itemize the amounts for each category, such as the purchase price, earnest money deposit, loan fees, title fees, recording fees, transfer taxes, commissions, prorations, and adjustments.

If you receive a taxable court settlement, you might receive Form 1099-MISC. This form is used to report all kinds of miscellaneous income: royalty payments, fishing boat proceeds, and, of course, legal settlements.

Class Action Settlement Sign in to your TurboTax account. Click the Income & expenses tab. Scroll down to other less common income. On the Line Miscellaneous Income, 1099-A, 1099-C click Start. On the page Let's Work on Any Miscellaneous Income scroll down to Other reportable income Click Start.

Most settlement proceeds get the same tax treatment as ordinary income. You should receive a 1099-MISC from the insurance company that paid the settlement and should add that to your tax return in the appropriate box. Lost wages may result in a W-2 tax form for reporting purposes.

Consequently, defendants issuing a settlement payment or insurance companies issuing a settlement payment are required to issue a Form 1099 unless the settlement qualifies for one of the tax exceptions.