Do you have to pay taxes on a structured settlement?

If a structured settlement is sold in exchange for a lump sum, those funds are generally not taxable. 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. The policy behind this law is that structured agreements are intended to provide financial stability and security for beneficiaries. However, it should be clear that several taxes come into play with respect to specific types of structured settlement transfers.

Nearly 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.

Even if you already have a structure, you may not know how they work and why they are configured the way they are. 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. If someone wants to sell a structured insurance agreement, which is usually done to receive the remaining lump sum, that money is also not taxable until the original contract is modified. Accordingly, a benefit for customers who choose a structured settlement annuity is that they don't have to worry about reporting any future annuity payments as income in the year in which any payment is received.

These have been around for more than a decade and are common in taxable cases, such as employment agreements. Although legislators prefer people to keep their structured agreements, there are no negative tax consequences to selling settlement payments. A structured settlement annuity may be ideal for many clients, including those customers in a higher tax bracket. The payer is more likely to pay over time and the recipient doesn't have to deal with the stress of receiving a large amount of money all at once.

An annuity offer outside of a structured settlement or receiving a lump sum will generate tax liabilities. 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. When a lawsuit is resolved in a court, especially a very large one, some courts allow the option of a structured settlement. It should also be noted that a gift tax may apply if the amount of the transferred annuity exceeds the current exclusion rate (which is the amount above which taxes apply).

Brokers can execute many financial projections based on a term of years, payments throughout their life, throughout their life in common with their spouse, etc. A structured settlement annuity (“structured settlement”) allows a claimant to receive all or part of a personal injury, death from negligence or workers' compensation settlement in a series of periodic income tax-free payments. 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.

Minnie Wuestenberg
Minnie Wuestenberg

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