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Tax Benefits of Structured Settlements

Structured settlements can provide significant tax benefits for plaintiffs in personal injury lawsuits. With a structured settlement annuity, the plaintiff receives periodic payments over time rather than a single lump sum payment. This steady stream of income offers economic stability, protects against poor financial decisions, and provides potential long-term care provisions. Most importantly, structured settlement payments are tax-free under federal law and state tax codes.

Here are some tax advantages of structured settlements in 2023:

Financial Security

Structured settlements provide guaranteed tax-free income over the lifetime of the plaintiff. The payments are tailored to the individual’s needs and often include cost of living adjustments to offset inflation. Offering individuals such a secure financial option brings significant peace of mind

Predictable Income

Structured settlement annuities provide predictable tax-free income over a set schedule. Plaintiffs can match the payment schedule to their specific needs. This income predictability makes financial planning easier.

Protection Against Poor Decisions

Statistics show most lottery winners go bankrupt within a few years of receiving a lump sum. Structured settlement amounts spread payments over time to prevent reckless spending. The tax-free income provides for needs today while building wealth for the future.

Potential for Long-Term Care Provisions

Structured settlements can include provisions to cover long-term care costs in the event of serious injury. These provisions guarantee tax-free income specifically earmarked for caregiving expenses, both now and decades into the future.

Tax Treatment

The primary tax benefit comes from Internal Revenue Code Sections 104(a)(2) and 130. These sections specify that funds received for damages, excluding punitive damages, arising from a physical injury or sickness are exempt from inclusion in gross income. As a result, such amounts are not subject to federal or state income taxes.

Requirements for Tax-Exempt Status

There are requirements that must be met for your future payments to qualify as tax-free:

  • Payments must originate from a claim for personal physical injury or physical sickness
  • The settlement agreement must state the payments are for physical injury or physical sickness
  • The recipient cannot have control of the lump sum investment
  • Payments cannot be accelerated or deferred
  • The claimant cannot use payments as collateral for a loan

Tax Implications of Lump Sums

A Lump sum settlement is immediately taxable upon receipt. Over 40% of the settlement can be lost to pay taxes. None of the tax exemption rules for structured settlements apply.

Wealth Building

The tax-free nature of structured settlements allows for significant wealth building over time. Recipients get to keep more of their settlement money now and in retirement.

Consult an Expert!

Structured settlement payments are the ultimate solution for those seeking a consistent and reliable source of finances that is entirely income tax-free. An experienced structured settlement consultant can explain the tax implications in detail and provide customized payment options, to maximize financial stability.

With the tax savings, structured settlements often deliver more value than lump sum settlements!

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