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Is There A Structured Settlement Tax?

I am often asked by my clients if there is a structured settlement tax. I thought it would be a good idea to have some discussion about the tax ramifications of the structured settlement. The lump sum, or if you accept payments over an extended period of time, are tax free.

The amount of money you receive from an insurance company is tax-free. If you invest these funds, the earnings from interest or dividends will be taxed as income in whatever your tax bracket happens to be. Now, you can see why structured settlements are so ideal, as they can be created in many alternative ways to make payments to you over a pre-set period of time.

Structured Settlement Tax Treatment - Tax-Free Earnings Are Possible

There are tax-free methods of earning money on your lump sum that you may have received. One such investment instrument would be the Structured Settlement Trust, which can be either tax-free or taxed, and will make pre-set payments to the owner of the trust. Unless you are extremely financially savvy, you will need the help of a qualified financial planner.

Are Structured Settllements Tax Free?

The Structured Settlement Tax Act Of 1982

When the US Congress passed the Periodic Payment Settlement Tax Act of 1982, it was with the intent of supporting periodic payments over lump-sums of cash. The reason being that people tend to go through their funds quickly, and often has a negative impact on their personal lives.

Since the act was passed, it is estimated that between $360 and $840 million per year has been provided in tax benefits, and has created an industry that produces over $6B per year in annuity premiums.

A Wise Investment Source

Many people think it is a wise choice to take a lump-sum of cash from their savings, and purchase a structured settlement. This way, they are getting a tax-free income stream of periodic payments over the life of the settlement. They are also buying the cash-flow at a substantial discount.

While the settlement holder might not be too happy about giving a discount, they are very happy about getting a large lump-sum of cash now, when they need it. The problem is that many people who receive a structured settlement as a award of a civil suit, or an out-of-court settlement, become disenchanted with the idea of only receiving small payouts over a period of years.

Very often, these settlement holders become the victims of a faltering economy, or other personal financial problems. Sometimes, they watch as lucrative deals pass them by, and they do not have the funds to get involved. Receiving a large lump-sum in exchange for their cash-flow can make all the difference in the world when you need some money for the kid’s college tuition, or to catch up on mortgage or car payments.

For the investor, a higher yield can be obtained than with traditional types of investments like stocks and bonds and real estate. There is no doubt that purchasing a structured settlement can reduce your federal tax responsibilities. When considering the structured settlement tax, speak to a professional organization like Einstein Structured Settlements.

source:IRS.GOV