Why §104 is unlike every other annuity in the U.S. tax code
Most annuities are tax-deferred at best — you delay the tax, you don't avoid it. A regular non-qualified annuity uses the "exclusion ratio": each payment is part return-of-basis (tax-free) and part interest (ordinary income). You pay tax on the growth eventually.
A §104 structured settlement is the only annuity in the U.S. tax code where every penny is excluded from gross income — principal, interest, growth, the whole stream — federally, by every state, clear of NIIT, clear of Medicare add-ons, for the entire term. It's the same statutory exclusion that makes the underlying personal-injury recovery tax-free; the structure just preserves that treatment across the payment schedule instead of collapsing it into a single lump-sum check.
Translation: $50,000 a year from a §104 structured settlement is $50,000 in your pocket. The same $50,000/yr drawn from a taxable account at a 24% effective rate is $38,000 in your pocket. Over a 20-year term that gap is six figures — sometimes seven.
Authority: IRC §104(a)(2); Treas. Reg. §1.104-1(c); Rev. Rul. 79-220 (periodic-payment exclusion); IRC §130 (qualified assignments).
Run your numbers.
Enter the lump-sum equivalent of your settlement and the period you'd structure it over. The calculator compares the tax-free structured stream against taking the lump and investing it in a taxable account.
Not every settlement is tax-free. These are.
§104(a)(2) excludes damages received on account of personal physical injuries or physical sickness. It's the broadest tax exclusion in the entire Code for plaintiff recoveries, but it has a hard edge:
- Qualifies (tax-free): Personal-injury, wrongful-death, medical malpractice, product liability with physical injury, premises liability, motor vehicle, FELA (railroad), Jones Act (maritime), workers' compensation.
- Tax-free only for physical components: Sexual harassment / Title VII with documented physical injury or sickness; some emotional-distress damages where physical symptoms originated the claim.
- Does NOT qualify (taxable): Pure emotional distress without physical origin, defamation, employment discrimination without physical injury, breach of contract, most class action settlements, punitive damages (even in physical-injury cases — see O'Gilvie v. United States).
For taxable settlements, structuring still helps via deferral (spreading the income across years) — but the analysis is different and the math more like the attorney fee calculator than this one. Different code section, different mechanics.
So what's the catch?
One word: irrevocability. Once the train leaves the station, it's going to the next station. No matter what.
Any structured payment stream is irrevocable. Once funded, you can't unwind it.
Whether it's a §104 settlement, a §453 installment sale, or a Childs-validated §468B attorney fee deferral — the carrier-funded annuity is non-commutable and non-assignable by you, the payee. That's a structural requirement of the favorable tax treatment in all three regimes. If the payments were freely convertible to cash, the IRS would treat the whole arrangement as a Year 1 lump-sum receipt under the constructive-receipt doctrine — and the tax-free (§104) or deferred (§453, §468B) treatment would collapse.
So you can't sell the income stream. You can't pull a lump sum if something comes up. You can't change the schedule once the carrier issues the annuity. It's a one-way door. That's the cost of the tax treatment.
…because it's a Swiss train. It'll show up on time. And it'll pay out.
The obligor on your payment stream is an A-rated U.S. life-insurance carrier (MetLife, Pacific Life, Independent Life, Berkshire Hathaway, etc.) with hundreds of billions in general-account assets, a 100-plus-year operating history, and a regulated reserve framework that has never failed to pay structured-settlement annuity holders in the modern era. The payment shows up every month, exactly on schedule, exactly the dollar amount printed on the contract.
Backstopped further by CLHIGA, the California Life & Health Insurance Guarantee Association — 80% of present value up to $250K per insured if a carrier ever did fail. Annuity guarantees are subject to the claims-paying ability of the issuing carrier.
No — opposite direction. J.G. Wentworth and similar factoring companies buy existing structured-settlement payments at a steep discount (50–60¢ on the dollar) from people who already have a structure and want a lump sum out. That's the exit side. You're on the entry side — using your settlement proceeds to buy a brand-new annuity directly from an A-rated carrier at face value, with full §104 tax-free treatment. Same two words on Google; opposite direction of money flow.
Every claim here traces back to a public source.
Read what the IRS, mainstream CPAs, plaintiff-side tax attorneys, and A-rated carriers themselves publish about IRC §104(a)(2) and qualified assignments under §130. Nothing on this calculator is a marketing claim — it's the consensus interpretation of a statute that's been in the Code since 1918.
For a deeper read on the §453 cousin (structured installment sales for property/business sales), see the What the Pros Say page — CPA Journal, Kitces, ABA articles, and the MetLife/Pacific Life carrier white papers. Different code section, same evidentiary backbone.
These numbers are illustrative. Real quotes come from carriers.
The "annuity effective payout rate" slider is a stand-in for what an A-rated carrier (MetLife, Pacific Life, Independent Life, Berkshire Hathaway/MassMutual, etc.) will actually quote on your case. Real-world rates depend on (a) current Treasury yield curve, (b) payment shape — period-certain vs life-contingent vs joint-life, (c) recipient profile, and (d) carrier competition at the moment of placement.
Typical period-certain payout rates in the current rate environment: 4.5%–6.0% for 15–25 year terms. Life-contingent and joint-life designs often quote higher because mortality credits get added in. The calculator above lets you stress-test the math at any rate; the real number lands when we pull live quotes from multiple carriers and stack them.
Timing rule: the structure has to be designed and signed before the settlement papers are executed. Once the plaintiff has the right to a lump sum, the constructive-receipt doctrine collapses §104 treatment on any subsequent structure. If your case is in mediation, settlement conference, or court-approval hearing — that's the window.
Settling a case in the next 90 days?
Structured settlements have to be designed before the settlement papers are signed — same timing rule as attorney fee deferrals. If your case is approaching mediation, settlement conference, or a court-approval hearing, this is when the conversation matters.
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