A properly designed structured settlement is "income tax-free" under Internal Revenue Code Section 104(a)(2), which states, "Gross income does not include...the amount of any damages received (whether by suit or agreement and as lump sums or as periodic payments) on account of personal physical injuries or physical sickness." All income derived from this type of damages is tax-free, regardless of any other sources of income available to you. Amounts received under workers' compensation claims filed after August 5, 1997 also qualify for the exclusion pursuant to IRC Sec. 104(a)(1).
Important Note: While structured settlement payments are income tax free, in the event of death of the structured settlement payee, the present value of any due, but not received, certain or guaranteed lump sum future structured settlement payments would be included in the estate of the decedent. Thus they may be part of the estate or inheritance tax calculation. Plan accordingly. The use of a full or partial "death commutation rider" may be helpful on the larger cases to which estate and inheritance taxes may apply and liquidity is likely to be an issue.
"Tax-Deferred" means that taxes on an investment are merely delayed to a later date, when through surrender or withdrawal, income is received and taxes become due. In certain situations, the annuitant may be in a lower tax bracket, and may benefit from the interest earned on the "deferred taxes", but income earnings will never be "tax-free."
Attorneys who properly structure their fees may benefit from tax deferral, For more information, please review the section on structuring attorney fees or call us!
Plaintiffs in cases involving taxable damages (punitive damages, employment litigation, environmental cleanups and monitoring, contract disputes, construction defects, post judgment interest and more), or where a portion of the damages may be taxable, may also benefit from a tax-deferred solution utilizing a non-qualified assignment.