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Tax-Free Structured Settlement

In some jurisdictions, a taxpayer may end up paying more than half of his income in taxes. This is due to historic tax increases combined with local and state taxes. Plus future income will likely be eroded more with the many tax proposals in the pipeline, including caps on exemptions and itemized deductions.

A tax on income is imposed by a majority of the states. 43 states in total have some form of taxation on income. Washington, Tennessee, Nevada, Alaska, Wyoming, Texas, South Dakota, and Florida are the only states that do not impose an individual income tax. With an average rate of 1.55 percent, there is also some form of county taxes in seventeen states.

Additionally, local income taxes appear under the following designations:

  • Local service taxes
  • Income taxes
  • Occupational privilege taxes
  • Payroll taxes
  • Wage taxes

They are taken as a percentage of state or federal tax, flat amounts charged to all, or as a percentage of wages or salaries. There are almost 5,000 local jurisdictions that impose taxes. This includes New York City and Maryland residents paying a local tax when they file their state taxes. And, in Yonkers, New York, they pay fifteen percent of their state tax as a piggyback local tax.

What Taxes Have to Do with Structured Settlements

We give you all of these numbers to give you context. To provide secure and guaranteed income to injured claimants on both workers’ compensation and liability claims, a structured settlement provides income tax free payments over time.

One of the most compelling features of the structured settlement is its ability to meet the future needs of claimants, including medical expenses. However, structured settlements are becoming an even more valuable settlement tool with the increasing tax rates across the United States.

To help you understand how valuable this is, let’s say the plaintiff received a $400,000 settlement. They are given the choice of getting the payout in a lump sum or paid over time as part of a structured settlement. With the structured settlement, the claimant would receive over the next twenty years $500,000 that is completely income tax free.

On any interest or gain income, they would need to pay federal, state, and potentially local taxes as well as asset management fees if they were to take the lump sum and invest it. More and more of your investment return is eaten up as taxes rise. This would put into question whether you would be able to meet future expenses and needs.

This makes a tax free structured settlement with a modest three percent yield a much more attractive option than a much higher yield that is subject to erosion from the ever increasing taxes. Structured settlement become an even better alternative when you factor in the absence of risk or volatility that is typically present in other investments.

Structured settlements are guaranteed. This means that if the payer of the settlement is no longer in business for some reason, then you will still get your payments. This makes the decision fairly obvious.