What taxes do I owe if I sell my structured settlement?
Taxes are an interesting part of structured settlements. In general, structured settlements are tax-free. However, the moment the recipient takes more control over that money, as in selling a portion of their payments for a lump sum, they may owe a combination of state and federal tax. This is not always the case, so it is importance to check with an expert about your specific situation.
The IRS code states that the receipt of annuity payments derived from a structured settlement are tax free to the recipient as detailed in US Code, Title 26, Subtitle A, Chapter 1, Subchapter B, Part III, Section 104 (a)(2). This means that while receiving periodic payments from a structured settlement you do not have to pay taxes on them, but when you cash out it is possible that the lump sum would be taxed.
The IRS Private Letter Ruling 119273-97, suggests that an individual’s sale of a structured settlement would not create a taxable transaction. In addition, HR 2884 confirms this ruling.
Each state having its own laws, we encourage you to verify with your accountant.