by John Darer CLU ChFC CSSC RSP CLTC
The tax treatment of structured settlement payments depends on the type of damages that the payments represent. It is not the structured settlement itself, the annuity or other qualified funding asset that triggers the tax treatment.
Structured settlement payments are income tax free to payees, provided that the payments are for damages that qualify under Internal Revenue Code Section 104(a)(2) [physical injury or physical sickness] or 104(a)(1) [workers compensation]. Payments retain their income tax status when paid beneficiaries.
Structured settlements for damages that do not qualify under these sections of the Internal Revenue
code offer tax deferral. Payments are generally taxed when received. For example, in an employment setting, structured settlements can be used in legal cases involving sexual harassment, wrongful termination, failure to promote and disicrimination settlements. There is a wide variety of lawsuits and disputes where a non qualified structured settlement or a reinsurance structuredsettlement can be very helpful in resolving cases.
Structured settlement documents must be meticulously prepared to reflect periodic payments as consideration for the structure portion of the settlement.
Structured settlement payment rights, often mislabeled as annuities, are in some cases being peddled by licensed insurance agent and financial advisors as well unlicensed intermediaries who mislabel themselves structured settlement brokers. It is important to distinguish structured settlement payments received from a lawsuit in which you were the plaintiff, or the beneficiary of someone who was a plaintiff and was receiving structured settlement payments, from structured settlement payments acquired from such people pursuant to a structured settlement factoring transaction.
Work with a credentialed structured settlement advisor to be sure that your structured settlement is established correctly.
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