Is a Structured Settlement Sale Subject to Income Tax?

You may be considering a structured settlement sale if you were recently awarded a structured settlement, or perhaps even after years of receiving structured settlement payments. You are not alone. Thousands of people every year are awarded money for their personal injury case. This money is almost always awarded in the form of a structured settlement. Thus you are among good company as many people consider to sell structured settlements just as you are. With a structured settlement sale you can access your money now, instead of waiting for small payments to show up each month. But you may be wondering if a structured settlement sale will change your tax situation. Let's explore this question.

Is a Structured Settlement Subject to Taxes in the First Place?

Most structured settlements arise from a plaintiff (the person who does the suing) winning a personal injury lawsuit. Such a suit is sometimes called a "tort" case. When you win that lawsuit the judge will award you damages to cover medical bills, pain and suffering, or to help with living expenses. These cash awards are not taxable. You do not pay federal or state income tax. You do not pay any kind of tax.

When Could Personal Injury Awards be Taxable?

There are ways that part of your award could become taxable. Let's say that the judge were to award you a lump sum of money. Then, you took that money and invested it into some stocks. Those stocks did really well and you earned thousands of dollars. You would have to pay income taxes (state and federal) on the money that you earned when the stock value went up. Or, if you used the settlement fund to purchase a business and that business did well. Then you would pay taxes on your profits from that business. In short, you do not pay taxes on the initial money you receive from a personal injury settlement. However, if you put that lump sum to work for you then you will most likely pay taxes on any interest you earn or any growth in that money.

How Can I Avoid Paying Taxes?

If you have a large lump sum of money you can use it to make a large purchase such as a home. This is a great investment. Any other money you will want to save for future use, to supplement your income. While you are not using the money you do really want it to earn money. So, you may wonder, where can you put it so it can earn money without being subjected to taxes? There are a few places.

First, this is one of the reasons that structured settlements were made. With a structured settlement your lump sum is invested into an annuity. Inside the annuity it does grow. Since an annuity is considered a type of insurance, not an investment, often you do not pay taxes on any growth. But, this varies depending upon the annuity and your person tax situation. Sometimes, you have to pay taxes on the growth of your annuity fund, but you will pay those taxes only when you withdraw your money. This means that you do not pay taxes until you have received all of the original money that funded the annuity; you will pay taxes when you start drawing the interest. Second, you can put your money into a Roth IRA. A Roth IRA (Roth individual retirement account) is a way to invest in stocks and mutual funds tax free. There are limits to how much you can invest in a Roth each month, so you should consult an accountant or tax professional for details. Third, you can spend the money in a way that will save you interest. For example, paying off high interest credit cards, personal loans or mortgages is a great way to get a tax free return on your money.

Does any of this Change with a Structured Settlement Sale?

If you are receiving structured settlement payments you can do a structure settlement sale any time. This way you take out your lump sum of cash, then invest in a Roth IRA or pay off your high interest loans as you see fit with no tax worries. Even if you cash out your structured settlement payments with a structured settlement sale you still do not pay any taxes on the original amount of money. Contact us and we can answer all your questions about taxes, timing and legal issues related to your structured settlement sale.

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