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If you've been awarded a structured settlement, you may be wondering about how you can turn that periodic payment into immediate cash. As a result, you might consider selling your settlement for a lump sum. One of the most common mistakes that people make is assuming that any non-taxable structured settlement is automatically going to result in a tax-free lump sum. Here's a look at what you need to know before you commit to a settlement so that you can avoid any tax misunderstandings.
What Do You Need to Know About Structured Settlement Taxes?
The Periodic Payment Settlement Act was passed in 1982 in an effort to make structured settlements a preferred choice for people who receive a financial award. The law prevents structured settlement payments from being taxed as income by the Internal Revenue Service. It applies to all sorts of payments, including some court orders and settlements from other incidents.
The law was revised in 1997 to include payments received from worker's compensation cases as well. This expansion required worker's compensation settlements to be paid as a structured settlement, and it included a provision to make them tax-free.
What Limitations Are There?
While the law made these payments exempt from taxes, it did include one catch. In order for your structured settlement to remain tax-free, you cannot make any changes to the payment structure once the agreement is put in place. If you make any changes to the terms of the payment contract, the remaining payments will then be taxed as income.
How Does Selling the Settlement Affect Your Taxes?
With the provision about changing the contract, you may wonder if selling your settlement will count as changing the contract terms. Luckily, selling your structured settlement doesn't change the actual terms of the payment contract. This means that your settlement funds will remain tax-exempt even if you sell all or part of it for a lump sum. All you're changing when you sell the settlement is who the payment is made to, so there's no modification to the contract.
It's important to remember, though, that the law does not apply to private tax-deferred contracts. It only applies to court-ordered settlements, personal injury cases and worker's compensation payments. If you sell a private tax-deferred structured settlement for a lump sum, you may be taxed.
What Does Inflation Have to Do With It?
Despite the long-term payment advantages of structured settlements, they aren't typically adjusted for inflation. Therefore, if the value of the dollar is reduced because of inflation, your settlement payment value is reduced as well. For example, imagine that you were awarded a settlement that pays $3,500 a month over fifteen years. That $3,500 will be worth more to you now than the same amount will be in five years if the value of the dollar is reduced. When the value of the dollar goes down, that $3,500 won't pay for as much as it will now.
You can avoid this loss of value due to inflation by selling your settlement for a lump sum payment. In exchange, the company that buys your annuity will reduce the amount you receive by a certain percentage. The percentage that you don't receive is their profit on the agreement. You then have the option to put that money into an interest-bearing account that will generate more money for you over time.
When you are awarded a structured settlement, it can give you a sense of security to know that you have consistent payments coming in every month. Unfortunately, sometimes things change and you may need more money for an emergency or other situation. With the information here, you can understand the implications of modifying your settlement agreement. You can also understand why you might sell the settlement for a flat lump sum and how that affects the contract. Talk to a structured settlement buyer or visit myLumpsum.com today to see if you qualify.
Share15 July 2015
