Structured settlements are a tool for claimants involved personal injury, wrongful death, and workers’ compensation cases. By structuring settlement proceeds into a series of periodic payments, claimants can take advantage of a number of benefits, including a long-term source of tax-free income. But what if your settlement isn’t from an injury case? Can you still benefit from structuring your settlement proceeds?
Qualified Settlements vs. Non-Qualified Settlements
Personal injury, wrongful death, and workers’ compensation settlements qualify under Internal Revenue Code §104a(2) for income tax exclusion. If the claimant chooses to place all or a portion of their settlement proceeds in a structured settlement annuity, both the amount placed in the annuity and any interest earned on the annuity will not be subject to income taxes.
While non-physical injury settlements are not eligible for income tax exclusion, there are still strategies to help claimants take advantage of tax deferral by receiving the settlement in the form of periodic payments. Taxes are paid only on the amount received during a given tax year, rather than the entire lump sum settlement.
How are Non-Qualified Settlements Handled?
Let’s say that Dave, a security guard, receives a $200,000 settlement in a wrongful termination case. If Dave accepts the proceeds of his settlement as a lump sum, the entire lump sum will be taxed at the highest applicable tax rate. That means that the settlement proceeds will likely bump Dave into a higher tax bracket.
On the other hand, if Dave places all or a portion of his settlement proceeds in a non-qualified structured settlement annuity, he can defer being taxed on the proceeds until the years during which the payments are received. If he chooses to only receive $10,000 over the course of a year, only that $10,000 will be considered taxable income for that tax year. The remaining money is held in the annuity, growing at a locked-in, guaranteed rate of return until the next scheduled payment.
Cases That May Benefit From a Non-Qualified Settlement
There are a number of different types of cases that may benefit from a non-qualified structured settlement. This includes:
Regardless of the type of case, the decision to utilize a non-qualified structured settlement annuity must be made prior to the finalization of the settlement.
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