Taxation of Structured Settlements
Structured settlements are the most practical option to benefit the victim of either personal injury or wrongful death of a family member. This is because they are designed to ensure the victim will not be burdened financially for the duration of their injury, whether that means for several years or a lifetime. Structured settlements also often consider the family, who may require aid to help pay for various expenses, including medical, bills, and funeral costs. In return for this annuity, which is purchased from an A-rated insurance company, the party who is held responsible for the injuries will be released from further legal obligation.
In 1982, the Periodic Payment Settlement Act (Section 104), concluded that any injured party should also receive tax relief for their periodic payments. In other words, the accumulation of aid throughout the year would be excluded from their gross income. In exchange for these tax benefits, the payments of a structured settlement are based on the victim's current medical needs, employment status, and future financial outlook. However, once a payment schedule has been ruled, the recipient will be unable to change the amount, duration, or frequency of payments. You could say that your structured settlement has been designed to give you as much aid as possible, but is inflexible to any changes over the long-term.
This inflexibility is the reason some beneficiaries find it necessary to sell their remaining structured settlement payments to a third party in return for a lump sum cash payment. As per, Section 130 of the Internal Revenue Code, any lump sum payout will also be excluded from the beneficiaries gross income. In fact, the only time this money can be taxed, is if it is used to acquire additional interest, dividends, or investment earnings, etc. Considering the stance that the IRS has taken on these payments, the tax benefit of your structured settlement will continue to serve you, regardless of how you choose to take advantage of it. Whether you decide to continue payments, sell a portion of your payments, or sell the entire amount for a lump sum; you can be confident it will maintain itself as a tax-free source of your income.