Are settlement annuities taxable?

A structured settlement annuity offers a flexible payment design, guaranteed payments, and no annual overhead or fee. Both capital and growth are income tax-free if the money used to purchase the annuity comes from a personal injury, workers' compensation, or wrongful death case. Because structured settlements for compensatory damages are exempt from tax, so are profits from the sale of future payments. Any time the source of the claim is based on personal physical injury, the principal amount of the settlement for the customer will be exempt from tax.

Structured settlements are intended to provide regular income to the injured party by distributing payments over several years, rather than distributing the money as a single lump sum, which could be badly spent. Payments received from a structured settlement annuity need not be reported on any tax return form (1040) or any tax document. Congress passed the Recurring Payment Settlement Act of 1982 to encourage the use of structured settlements in cases of physical injury and wrongful death. However, with a structured settlement annuity, if a customer places all or part of their net settlement in a structured settlement annuity, the principal amount plus any interest accrued within the annuity is tax-free.

Collecting your settlement and reallocating that money to non-exempt investment vehicles would result in you owing taxes on dividends, interest, income, or capital gains. As long as you consider these issues before signing a settlement agreement in your case, you can structure as much or as little as you like and take the rest in cash. In 1996, a change in the tax code established that injuries must be of a physical nature for settlements to receive tax-exempt status, according to the U.S. Bar Association.

The National Structured Settlements Trade Association 601 Pennsylvania Avenue NW Suite 900 South Washington, D. The long-term financial security they provide to settlement holders reduces the burden on public assistance programs. Structured settlements are tax-efficient and can also have wasteful and asset protection advantages. Unlike some financial investments, structured personal injury settlements usually have no tax implications.

The Supreme Court holds that the amount received in resolving a claim for late payment and liquidated damages under the Age Discrimination in Employment Act does not qualify for §104 (a) (exclusion). One way to avoid this is to establish a structured settlement annuity for the client to receive their settlement funds.

Minnie Wuestenberg
Minnie Wuestenberg

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