What You Should Know About Lawsuit Structure Settlement Taxes

What You Should Know About Lawsuit Structure Settlement Taxes

In a civil lawsuit, there are annuities awarded as recompense called structure settlements. In order to maintain the financial needs of a claimant, a long-term income stream is provided by these financial vehicles which are its main purpose. It is common for structured settlements to be provided as a one-time lump sum payment.

There is usually no tax implications when it comes to structured settlements for personal injuries, unlike some financial investments. Tax implications are typically found towards structured settlements for wage and other non-personal injuries. 

This tax-free benefit includes workers’ compensation settlements, together with payments from wrongful death lawsuits. However, some tax liabilities could come out from some situations and can become questionable. It’s always best to consult a tax professional to learn about specific tax implications from your settlement and avoid unnecessary headache come tax season.

What are Punitive Damages?

A defendant may be ordered to pay for reckless or negligent behavior, also referred to as punitive damages or exemplary damages. An actual injury as punitive damages cannot be paid as compensation although they can be awarded in personal injury cases. You as the claimant can instead consider the monetary reward as a punishment for what the defendant did to you or for causing you harm.

Any income that comes from punitive damages is considered taxable since making up for your health or contributing to medical expenses is not the purpose of this award.

Each person can find themselves in different or unique situations that have specific tax implications from their settlement. Consulting an Accountant or a Tax Professional can help you identify these tax implications or avoid them overall.

What are lottery structure settlements?

The benefits of lottery winnings are different from personal injury structured settlements. There are two different ways on how your lottery winnings are taxed and they depend on how you receive your winnings from the lottery.

All the income you receive is taxable if you receive a lump sum payment and at one time, will be subject to federal and state taxes. You will then have the freedom to decide whether to spend or invest the money you received.

IF the lottery structure settlement provides a periodic payment to you, each payment will fall under the current federal and state taxes. What makes receiving a structured settlement advantageous over the lump sum payment, is that you can gradually pay the taxes. 

How does Workers’ Compensation Exceptions work?

If you had an injury or got sick as a result of your work, you will be paid with workers’ compensation. If awarded amounts are specifically contributed toward medical bills, workplace damages are not considered taxable income.

On the other hand, if you need to supplement the lost income from a work-related injury, and you receive a settlement to do so, taxes will have to be paid on payments by you. Additionally, if a workplace settlement from a discrimination or slander case is granted to you, your payments will be viewed as taxable income.

If combined with Social Security income or other supplemental Social Security benefits, you may also to deal with taxes to a portion of your workers’ compensation benefits. 

How does selling your structured settlement works?

As long as the contract terms do not change, personal injury settlements are not seen as taxable income just as the future sales of these payments. All structure settlements that fall outside of personal injury, however, are taxable including the sale.

You have the freedom to choose whether to sell all or a portion of your payments but you may want to do so at a discounted rate if you want immediate access to your cash. Not all lottery winnings can be sold which is the opposite of more common structured settlements. You must first ensure that it can be sold if you end up choosing to sell your lottery structure settlement. There are several lottery settlements that require court approval in order to be sold to make sure that the transaction is at the winner’s best interest. Factoring companies are prevented from taking advantage of settlement holders because of this move made by the Congress and state lawmakers. The approval of sales of structured settlement payments is considered by judges to determine whether the sales are in the best interest of the people who sell their payments.

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