Structured settlement annuities are not taxable — they’re completely tax-exempt. It’s a common question that we are asked by personal injury attorneys, and in certain situations, the tax-exempt nature of structured settlement annuities results in significant tax savings to the client.
When are Client Settlements Tax-Exempt?
Any time the origin of the claim is based on a personal physical injury, the principal amount of the settlement to the client will be tax-exempt. This principal amount would not be reported on a client’s tax return (Form 1040). In short, that principal amount is tax-exempt. However, if the client invests the amount received at settlement (i.e., the principal), any interest earned on the investment is taxable.
However, with a structured settlement annuity, if a client places all or a portion of their net settlement into a structured settlement annuity, the principal amount plus any interest earned within the annuity is tax-exempt.
This unique tax benefit is based on Internal Revenue Code Sections 104(a)(2)¹ and 130² of the Internal Revenue Code.
Consequently, one benefit to clients who choose a structured settlement annuity is that they don’t have to worry about reporting any future payments from the annuity as income in the year any payment is received.
A structured settlement annuity can be a great fit for many clients — including those clients in a higher tax bracket.
If you have any questions about the advantages and disadvantages of a structured settlement annuity, or if you have questions about the tax-exempt status of structured settlement annuities, please give us a call at (801) 683-7362 or email us at [email protected].