When you get a structured settlement, having the consistent payments to rely on can be a welcome change for your budget. Unfortunately, that's not always the best financial fit for your situation. If you need cash right away, you may find that a lump sum settlement is a better way to go. It's important to understand, though, that the tax implications are different between the two. Here's a look at what you need to know about the taxes for both structured settlements and lump sum payments.
Why Structured Settlements Aren't Taxed
Structured settlement payments are tax exempt as part of the 1982 Periodic Payment Settlement Act. The goal of this act was to encourage people to take structured payments instead of asking for lump sums as part of a settlement agreement. The law was later expanded to include payments from worker's compensation cases, adding a mandate that worker's compensation payments made as a structured settlement were also exempt from federal income taxes.
How Changing Your Settlement Affects Your Taxes
In order for your settlement to be classified under the non-taxable clause of the Periodic Payment Settlement Act, you have to maintain the payment arrangement as it was originally agreed. Any changes to the timeframe, amount or other agreement will negate that tax exemption and any money you receive later will be considered income and taxed accordingly by the Internal Revenue Service.
What About Selling the Settlement?
This doesn't necessarily mean that you will be liable for taxes if you sell your structured settlement. Selling the settlement payments for a lump sum doesn't change the original contract. In fact, your original settlement agreement remains intact, only the payee is changed. This doesn't negate your tax exemption on the settlement, because no terminology in the contract is actually modified.
You would have to change the payment cycle, distribution period or other details in the contract to be liable for taxes under this exemption. Just remember that this only applies if your settlement is court-ordered due to injury or other legal finding.
When Should You Sell Your Settlement?
If you're considering a lump sum and want to sell your structured settlement, consider the current value of the dollar before you do so. Remember that structured settlements don't typically adjust for inflation, so if there are any impending changes coming for the economy, you're going to want to make the most of the cash you have accessible. By selling now, you can invest before the growth to give your money time to earn as much return as possible.
With the information here, you'll have a better understanding of the tax liability of changing your structured settlement and how selling it can help you avoid that risk. Talk with a settlement buyer about your options for lump sum settlements today to see if it can work for you.