How Is Income From Structured Settlements Taxed?
Income received from court awards as a result of personal injury is normally not taxable. For this reason, many personal injury awards are set up as structured settlements, usually in the form of an annuity, to completely preclude paying tax dollars on the income. This is one of the primary positives of structured settlements where you receive payments over a specific period of time.
However, the income tax treatment can change completely when a structured settlement is sold. There are quite a few businesses out there now who will give to find structured settlements out of those wanting to obtain a lump sum of cash in exchange for periodic payments. Once the periodic defrayals from a structured settlement are sold, the proceeds normally lose their tax-free status.
As you can imagine, with companies vying to buy structured settlements for lump sums of cash, abuse is a monumental concern. So, in 2002, President Bush signed legislation too attempts to stop companies from abusing individuals who are marketing part or all of their structured settlement. Most states now enforce very strict facilities and even make court endorsement before any structured settlement sale can take place, otherwise a substantial additional tax is placed on the proceeds of the sale. These new laws are planned to protect people from marketing a structured settlement for drastically less than its true value.
Structured settlement agreements are extremely complicated. Your perfect bet is to have a competent personal injury attorney with encounters in these trouble review your structured settlement contract and advise you of your options.
One of the assistance of structured settlements is the payments are tax free. But, following your death, any lump sum or additional payments to your survivors may not be tax free, so you should also consult investing in a qualified tax attorney about the tax consequences to your survivors of inheriting your structured settlement payments