Introduction
As most plaintiff attorneys are aware, using a traditional structured settlement annuity in a personal injury case can significantly reduce your personal injury client’s tax bill because the principal and interest in the annuity are tax-free, as discussed in our post in taxation of structured settlements.
However, in instances that are not governed by Section 104(a)(2) — meaning, in cases that are not based on a personal physical injury — non-qualified structured settlement annuities can be equally important, if not more so, in helping reduce your personal injury client's tax bill.
This article discusses the key differences between qualified structured settlement annuities and non-qualified structured settlement annuities, and how the latter can help your client save on taxes.
What are the Differences Between Qualified Annuity and Non-Qualified Annuity?
The typical structured settlement annuity that most attorneys are familiar with is known as a qualified structured settlement annuity, and these are used when the settlement is based on a personal physical injury. Typically, if a plaintiff is receiving a reward or an award because of a personal physical injury that they've suffered, all of the interest that’s earned inside of the structured settlement annuity is considered tax-exempt.
A non-qualified structured settlement annuity, on the other hand, is based on non-personal physical injuries, such as a construction defect case, an employment case, or a whistleblower case. In cases like these, it is almost more important to the plaintiff to use an annuity because it is possible to stretch out the taxation of that award so that the client does not have to pay the tax on their award and on the plaintiff attorney's portion of that award as well.
How Can Non-Qualified Annuities Undercut the Effect of the Trump Tax Cuts on Taxable Damage Cases?
Due to the Trump tax cuts, in most taxable damage cases, your client will have to pay tax not only on their award but also on the plaintiff attorney's fee portion. However, by using a non-qualified structured settlement annuity, your personal injury client is able to spread out the taxation of that award over several tax years, lower their tax bracket, and save significantly on their income tax bill.
So, if you have a whistleblower case, an employment case, a construction defect case, an environmental claim case, or some type of case that is not based on a personal physical injury, give us a call. As specialists in structured settlements and settlement tax planning, we can show you and your client how much tax the client can save by using a non-qualified structured settlement annuity.
You can also explore tax-saving strategies with our free Settlement Tax Calculator. It provides a detailed estimate of your tax liability and shows how you can keep more of your settlement.
