How to Protect Clients From a Large Tax Bill in Taxable Damage Cases

HomeStructured SettlementsHow to Protect Clients From a Large Tax Bill in Taxable Damage Cases

Here at Amicus Settlement Planners, most of the calls we receive are for case settlements that are based on a personal physical injury. But every now and then we get calls for a taxable damages case.

Taxable damages lawsuits include cases involving breach of contracts, discrimination, sexual harassment, defamation, fraud, whistleblower, or other kinds of cases not based on a personal physical injury. 

Section 104(a)(2) states that settlements resulting from a personal physical injury case are to be received tax-free.

In taxable damages cases, the clients could face huge tax consequences as a result of the settlement. There are some planning strategies we can explore with the client at the time of settlement to help mitigate the client’s tax liability for these types of cases.

Non-Qualified Annuities: One Planning Options

Non-qualified structured settlement annuities allow clients with a taxable damages case to put all or a portion of their settlement into a non-qualified structured settlement annuity. Because the client receives the settlement over a period of years, the client is only taxed in the years that the annuity payments are received. 

So, for example, if a client receives a $1M settlement, rather than paying tax on the full amount in the current year, the settlement can be spread out over many years to reduce the client’s tax bracket and overall income tax liability.

There are also some innovative trust options that have recently been introduced to the market that we can discuss with you and your client.

How the Trump Tax Cuts Affect a Client’s Tax Bill

Another factor that increases a client’s tax bill is the Trump tax cut act that was passed in 2017. As a result, clients are not only taxed on their award but also on the attorney’s portion of the fees. It was an unintended consequence of the bill, but it is something that attorneys have to consider for their clients. Clients are often not happy to find out that they have to pay taxes on the attorney’s portion of the settlement — funds that the client will never receive.

Conclusion

Using a non-qualified structured settlement annuity can help your clients save on their income tax bill by spreading it over several tax years instead of paying it in a single tax year. 

If you have a taxable damages case, give us a call and we can help your clients reduce their overall income taxes from the settlement.

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