What are the tax advantages of structuring a settlement? It is a common question that new clients often ask, and the answer is always the same. A qualified structured settlement yields to a greater tax advantage than receiving a lump sum because the structured settlement will provide the claimant with tax-free future payments.
Federal tax codes have explicitly encouraged the use of structured settlements since 1983. Under the current law, structured settlements are excluded from federal and state income taxes because the claimant’s gross income excludes both the principal and accumulated interest, since the claimant doesn’t own or governor the funding asset. Therefore, the claimant is not taxed. Although lump sum settlements are also tax-free, the future earnings from investments of the lump sum are fully taxable. By structuring a settlement the claimant avoids taxation.
The answer is obvious, structured settlements provide claimants with financial security.