by John Darer® CLU ChFC MSSC RSP CLTC
When structuring attorney fees or taxable damages in the second half of the year, it is common to push the first payment out until January of the following year so that it is not received in the same tax year as the settlement. An attorney who is already having a great income year can use this strategy to delay receipt (and thereby some of the taxes) on the fee. In some cases this may result in a lower tax bracket.
Care should be taken to avoid the tax planning strategy backfiring by not using a January 1 payment start date for structured attorney fee payments. Many structured settlement annuity issuers automatically send out payments by check in advance, to assure they arrive on time. One company is known to send out payments as much as 10 days in advance!
Even if you have direct deposit, you're not completely out of the woods with a January 1 payment date. The annuity issuer has a contractual obligation to make payments on time. This applies not just to your January 1 payments, but to likely to tens of thousands of other annuitants and policyholders with the same payment due date. In 2016, January 1st was on a Friday and the next business day was Monday January 4, 2016. If the insurer waited to pay the next business day, payments for thousands of people would have been 3 days late. Therein lies their dilemma. So a number of insurers set their computerized payment systems to release direct deposit payments early so that they would be in good faith and timely.
It is possible that you will also receive a 1099 for that payment, in the year of settlement. What a way to mess up your tax planning if you're not careful.
The same issue goes when using a structured settlement for taxable damages.
How to Avoid Getting Hit With Unexpected Income in the Wrong Tax Year When Structuring Attorney Fees
- Select a first payment date no earlier than January 10th, if getting paid by check
- Select a first payment date a few business days into January, if being paid by direct deposit.