Almost all structured insurance settlements are completely tax-free. This includes federal state taxes %26, taxes on interest, dividends and capital gains, and the AMT. The reason for this is that the government believes that receiving compensation for physical injury, wrongful death, or workers' compensation is not an income gain. It is a restoration of the state before the loss.
However, if the client decides to invest their settlement funds, then the interest that grows on the investment is taxable. One way to avoid this is to establish a structured settlement annuity for the client to receive their settlement funds. All interest that grows within the structured annuity will also be exempt from taxes. Payments received from a structured settlement annuity need not be reported on any tax return form (1040) or any tax document.
Both the principal amount and interest on the annuity are completely tax-exempt. The sale of annuity payments from a structured settlement will not be taxable as income, in general. However, in some cases there is a tax liability when selling those annuity payments, so it's important to plan accordingly. Injured parties will never pay taxes on the structured settlement money awarded in these cases, regardless of whether they receive the money in a series of payments or if they sell their payments for a lump sum.
Congress passed the Periodic Payment Settlement Act of 1982 to encourage the use of structured settlements in cases involving physical injury and wrongful death. Structured settlements and lump-sum payments for compensatory damages in personal injury cases are tax-exempt. In other words, the money in your settlement is only excluded from your tax liability as long as it is maintained and paid out of the annuity or Treasury bond financed by the defendant at the time of the settlement agreement. However, accountants need to know the reasons behind the structured agreement to see if it was due to personal injury, wrongful death, or workers' compensation.
Brokers can execute many financial projections based on a term of years, payments throughout your life, throughout your life in common with your spouse, etc. Structured settlement payments and proceeds from the sale of these payments are also exempt from state taxes and taxes on dividends and capital gains. If you have any questions about structured settlement annuities, or if you have a customer who can benefit from the tax-exempt status of a structured annuity, call us. By law, in most cases, the IRS cannot tax revenues from a structured settlement, regardless of whether they are paid in a series of payments or in a single lump sum.
These have been around for more than a decade and are common in taxable cases, such as employment agreements. The defendant or insurer then pays the settlement funds to a third party assignment company, which assumes responsibility and purchases an annuity from a structured settlement insurance company. The payer has a better chance of paying over time, and the recipient doesn't have to deal with the stress of receiving a large amount of money in one go. A family member or close friend), but in those cases, any income accrued from the annuity when the transfer occurs will be taxable.
The decision to use a structured settlement must be made before finalizing the settlement agreement. Even if you already have a structure, you may not know how they work and why they are configured the way they are. .