Sell Structured Settlement Tax Implications 2

Question 1

A structured settlement designed to compensate for lost wages — rather than physical injury — is treated how for federal income tax?

Accepted Answer

Taxable as ordinary income because lost wages are not excludible under Section 104(a)(2)

Answer

Tax-exempt under Section 104

Answer

Subject to Social Security tax only

Answer

Tax-deferred until payments begin

Question 2

If a payee sells structured settlement payments at a gain relative to the tax basis, what type of tax may apply?

Accepted Answer

Capital gains tax

Answer

Estate tax

Answer

Excise tax under Section 5891

Answer

Employment tax

Question 3

What is the tax basis of a structured settlement payee's payment rights for purposes of calculating gain on a sale?

Accepted Answer

Zero, because the payments were received tax-free

Answer

The total present value of all future payments at the time of sale

Answer

The original settlement amount paid by the defendant

Answer

The annuity purchase price paid by the defendant's insurer

Question 4

Does the sale of a structured settlement for a lump sum affect the payee's eligibility for means-tested government benefits such as Medicaid?

Accepted Answer

Yes — receiving a large lump sum can disqualify a payee from Medicaid or SSI due to asset limits

Answer

No, settlement proceeds are always exempt from Medicaid asset tests

Answer

Only if the lump sum exceeds $1 million

Answer

No — federal law prohibits considering settlement proceeds as assets

Question 5

Which professional is best qualified to advise a structured settlement payee on the potential tax consequences of selling their payments?

Accepted Answer

A licensed tax attorney or CPA familiar with structured settlement transactions

Answer

The factoring company's sales representative

Answer

The annuity issuer's customer service department

Answer

The court clerk

Question 6

What is a 'structured settlement annuity qualified assignment' company (QAC)?

Accepted Answer

A special-purpose entity that assumes the periodic payment obligation from the defendant under a qualified assignment

Answer

A company that buys structured settlement payment rights on the secondary market

Answer

An IRS-registered clearinghouse for structured settlements

Answer

A nonprofit that provides legal services to structured settlement payees