Taxation of Structured Settlements
Structured settlements are tax-free financial vehicles used to compensate for personal injuries. However, there are a few exceptions that could incur tax liabilities.
Tax-Free Structured Settlements
Unlike some financial investments, structured settlements for personal injuries usually have no tax implications. This makes them an excellent vehicle for long-term financial security.
An annuity is a financial asset purchased from an insurance company, which pays the full amount over a number of years. Annuities are popular for retirement savings, especially when you've already contributed the maximum to your 401(k).
Generally Tax-Free:
- Personal injury settlements
- Workers' compensation settlements
- Wrongful death lawsuit payments
For specific tax implications from your settlement, always consult a CPA or tax attorney.
When Taxes May Apply
There are some situations that could bring tax liabilities. Each situation is unique, so always consult a CPA or tax attorney for specific advice.
Punitive Damages
Punitive damages are not paid to compensate for an actual injury. Instead, this monetary reward is seen as a punishment to the defendant. Since this award is not meant for medical expenses, any income received from punitive damages is considered taxable.
Lottery Structured Settlements
Lottery winnings do not have the same benefits as personal injury settlements. Whether you receive a lump sum (taxed at once) or periodic payments (taxed gradually), lottery winnings are subject to federal and state taxes.
Workers' Comp Exceptions
If you receive a settlement to supplement lost income from a work-related injury, you may have to pay taxes. Settlements from discrimination or slander cases are also viewed as taxable income.
Selling Your Structured Settlement
Just as personal injury settlements are not seen as taxable income, so are the future sales of these payments as long as the contract terms do not change. However, all structured settlements that fall outside of personal injury can be taxed, including the sale.
You can choose to sell all or a portion of your payments, but at a discounted rate in exchange for immediate access to your cash.
Unlike more common structured settlements, not all lottery winnings can be sold. If you choose to sell your lottery structured settlement, you must first ensure that it can be sold. Some lottery settlements require court approval to ensure the transaction is in the winner's best interest.
Let CBC Help
Our team of experienced, caring professionals will make the process of selling some or all of your structured settlement or annuity payments easy.