Payment For Future Money

Tax-Free Payments for Future Money

Section 104 of the Internal Revenue Code of 1986 (IRC), as amended [also known as 26 USC §§ 104], provides that: "Compensation for injuries or sickness - (a) In general, except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical injuries, expenses, etc.) for any prior taxable year, gross income does not include - (1) amounts received under workers' compensation acts as compensation for personal injuries or sickness; and (2) the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness."

This is reiterated in the Treasury Regulations (also known as 26 CFR) §§ 1.104-1(c), which provides in part that the term "damages received (whether by suit or agreement)" means an amount received (other than workers' compensation) through prosecution of a legal suit or action based upon tort or tort type rights, or through a settlement agreement entered into in lieu of such prosecution. Unless otherwise provided by law, gross income means all income from whatever source derived. [IRC §§ 61(a).] Basically, it means that either at the time of initial settlement or at such time as you may receive payment for future money (cashing-out), the money is tax-deductible.

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