Nov 8, 2024
•
6 min
Are Annuities Taxable?
In this guide we’ll help you understand how annuities are taxed, when they're taxed, and strategies to manage your tax liability effectively....
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A structured settlement is a stream of tax-free payments that serves as compensation for a personal injury suffered by a claimant in a lawsuit. Lawyers can negotiate a structured settlement agreement in settlement of a claim to avoid going to court, or the defendant may make structured settlement payments to the Plaintiff if they lose the case. The defendant and claimant then work with a qualified assignee and an insurance company to set up a structured settlement through the purchase of one or more annuities.
Once terms are established, the insurance company will distribute the amount the defendant owes on a predetermined schedule for a set time period. These regular payments can be distributed on a periodic basis, usually monthly, quarterly, or annual basis.
Being on the receiving end of structured settlement payments can have long-term financial benefits, especially if you have substantial medical bills. However, if you’re in need of a large sum of cash to meet immediate expenses, having a predetermined payment schedule may not serve as the best course of action. Although this may be frustrating, you have options. Selling your structured settlement payments may be a viable path to get out of debt by receiving a lump sum of cash.
In order to sell your structured settlement payments, you will need to work with a company that will purchase some or all of your settlement payments from you and pay you a lump sum in return. Structured settlement types that are eligible to be sold typically include payments for personal injury, medical malpractice, and wrongful death. If you’re unsure, you contact a company that purchases structured settlement payments and they can assess your individual situation.
The length of the process varies when it comes to selling your structured settlement. However, on average, it takes 45-60 days before the transaction is finalized. Selling your structured settlement requires court approval, so this can take time depending on state law requirements and your individual case. However, having your documents in order can help expedite the process.
If you have a pressing need that cannot wait, please let your Peachtree representative know right away! We have a number of options to help you while you wait, including cash advances of a portion of your purchase price.*
You have multiple options when it comes to selling payments. When you discuss your financial needs with your representative, they will outline all your options to help you choose the best course of action.
Typically, you have three options when you are selling structured settlement or annuity payments:
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You can sell your structured settlement payments by working with settlement companies, also known as factoring companies, like Peachtree Financial Services that purchase payment streams. After the structured settlement buyer assesses your eligibility, you will work with them to establish the number of payments you’re selling and the lump sum payment you would receive in exchange. After a determined waiting period mandated by state law, you will sign a contract. The purchasing company then files a petition for court approval to set a hearing date.
Since structured settlements are typically large sums of money, a judge must approve the transfer of structured settlement payments. The court process is in place to ensure you are aware of what you are doing when you sell your payments and that the sale is in your best interest, taking into account any of your beneficiaries. There are state and federal laws in place to make sure that you fully understand the transfer agreement, how much money you will be walking away with, and all of the nuances of selling your payments.
The choice to sell your settlement payments is personal, and everyone’s circumstances are different. If you are struggling to keep up with bills and/or are drowning in high-interest debt, selling some or all of your structured settlement payments may be a reasonable solution. Knowing your options will help you make the decision that is best for your circumstances and finances.
In most cases, there are no tax consequences involved in setting up or selling payment streams due to the 1982 Periodic Payments Settlement Act. Under federal law, the IRS and state governments are barred from applying taxes to structured settlement income. This is in place to guarantee financial security to recipients and extends to interest and dividends earned by structured settlement account funds.
With that being said, some portions of settlements are subject to income taxes. For instance, per IRS regulations, any compensation for punitive damages in a lawsuit is subject to taxes. Punitive damages refer to compensation that a defendant must pay on top of a settlement amount as punishment due to gross negligence or intentional harm.
Additionally, settlement amounts in compensation for lost wages due to emotional distress or discrimination that were not caused by a physical injury or illness are also subject to income taxes.
If you are concerned about tax consequences, speak to your financial advisor or tax consultant prior to selling your payments.
Peachtree covers the full cost of the transaction, and our attorney will submit the transaction documents to the court. Peachtree’ attorney does not represent you. You will need to hire a lawyer if you want independent advice on your sale or if you live in a state that requires you to consult with a professional advisor or attorney.
Every situation is different, but generally you will always need: a copy of your annuity contract and settlement agreement, any additional documents that are relevant to your settlement and annuity, a government issued ID, and proof of residency.
If you need help gathering any of these documents, your representative will be able to assist you.
Many factors go into determining what we can offer you for your future payments, including the amount of each payment, the frequency of the payments, and when you are scheduled to receive them. Let us know how much you need, and we can provide an estimate for what you could receive for your payments.
Have you sold a portion of your structured settlement payments in the past? What insurance company issues your checks? Knowing the answers to these questions will hasten the process as you work with your representative.
If you called Peachtree in the past but decided not to accept any of our offers, your quote this time will likely be different. Why is that? One of the main reasons that your quote will change has to do with the present value of your settlement payments.
Our experienced, dedicated representatives listen to your goals and then clearly explain all payment sale options available to you. It is all part of something we call the Peachtree Promise. We know your needs are unique, and we work with you step-by-step so that you can determine the best course of action to meet your financial goals.
For more information, call our team at 1 (800)-821-7773 for a free quote. You can also fill out our online form to get in touch with a knowledgeable representative.
Peachtree Financial Solutions is here to help people from all walks of life reach their financial goals. From moving into a bigger home, to getting a more reliable car, to paying tuition, we’ve helped tens of thousands of people.
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