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Tax and Structured Settlements
Structured settlements are agreed upon when two parties opt for dismissing the court case in exchange for a financial arrangement that has to be made by the defendant. The defendant and the plaintiff decide about making regular payments over a certain period of time. Most injured parties choose the structured settlements options because of the benefits it offers. One of the most important advantages of these kind of settlements is that they hold a great number of tax advantages.
Under the Internal Revenue Code Section 104(a) (2), the amount that you have received for damages or because of physical sickness or injuries is tax free even if you have many other income sources available to you. Unlike dividends, salaries, royalties and other forms of income, the payment that you receive from the structured settlement is free from the tax payments. The tax avoidance benefits of the structured settlements have made these agreements attractive for parties who are unable to find any other form of investments that can lead to tax free benefits.
Many parties opt for the lump sum payments instead of periodic payments to invest in some other business in future but are liable to pay taxes on dividends or any royalties that they receive from those investments. Another reason for opting for the lump sum payment over structured settlements is that parties might not feel that the payment they are receiving is enough to cover their medical expenses as well as family needs. For this purpose many parties opt for lump sum payments and those who have already agreed upon these sell them to some other party to gain cash and fulfill their daily and medical needs.
When deciding upon the structured settlement agreement the plaintiff should consider various important aspects such as deciding on the value of the periodic payment, the terms and conditions, the risk involved and many more. The agreement of the structured settlement should be properly carried out so that it enjoys the benefits of future security and tax avoidance. There is no other source of income that is tax free like the annuity payments from the structured settlements. This significant advantage of the structured settlement encourages injured parties to agree to receive periodic payments.
Many parties who are receiving the periodic payments decide to sell their settlement plan if they do not have enough money for meeting their medical emergency needs or if they have agreed to the amount of payments without considering their own expenses properly. This is because once you have agreed upon the terms of the agreement it cannot be changed.
So as far as tax benefits go, structured settlements are the way to go when receiving a payout. One of the disadvantages however is the fact that your settlement payout is usually fixed and is not adjusted according to inflation. This means that down the track the payments may not be sufficient to cover expenses as the cost of living rises. Nevertheless there are a number of advantages that make this kind of settlements a popular form of insurance payout amongst Americans.