Just as personal injury settlements are not considered taxable income, so are future sales of these payments, as long as the terms of the contract do not change. However, all structured settlements that fall outside of personal injury can be taxed, including sale. But 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. Almost all structured insurance settlements are completely tax-free. This includes federal state taxes &, 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. 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 to beneficiaries.
However, it should be clear that several taxes come into play with respect to specific types of structured settlement transfers. The assignment company will purchase the annuity from its parent life insurance company, and the assignment company will keep the policy and pay you every month as required by the contract. Once both parties have agreed on the details of the structured agreement, the plaintiff releases the defendant (or insurer) from liability. We can discuss it with your client and establish a structured settlement annuity so that you can maximize your settlement funds and save on taxes. The choice is ultimately the plaintiff's, and many consider a structured settlement to be much more beneficial than a lump-sum cash payment.
Whether inherited payments are taxable or not depends on several factors, so it's a good idea to consult with a tax professional when planning your estate. Even if you already have a structure, you may not know how they work and why they are configured the way they are. For example, if you receive your settlement as a one-time payment and invest the money in the stock market, you will owe tax on dividends and accrued interest. Accordingly, a benefit for customers who choose a structured settlement annuity is that they do not 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. Because structured settlements for compensatory damages are exempt from tax, so are profits from the sale of future payments.
Structured settlements and lump-sum payments for compensatory damages in personal injury cases are tax-exempt. You have a structured settlement that provides a reliable payment flow, but now you need a larger cash injection. 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 exempt from tax. In conclusion, it's important to understand how taxes apply to your particular situation when it comes to structured settlements. While most personal injury settlements are exempt from taxation, other types of settlements may be subject to taxation depending on how they are handled.
It's always best to consult with an experienced tax professional before making any decisions about your structured settlement.