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

Section 104(a)(2) only excludes damages received on account of physical injury or sickness — payments representing lost wages without a physical injury component are taxable.

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

If the IRS treats the sale of structured settlement payment rights as a capital asset transaction, any gain over the tax basis may be subject to capital gains 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

Because the periodic payments are received tax-free under Section 104, the payee's tax basis in the payment rights is generally zero, meaning the entire lump sum from a sale may be a taxable gain.

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

A large lump sum from selling structured settlement payments can push a payee over asset thresholds for Medicaid, SSI, and other means-tested programs, potentially causing loss of benefits.

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

A tax attorney or CPA with structured settlement experience can analyze the payee's specific situation and provide accurate advice on taxability, basis, and benefits implications.

Sell Structured Settlement Practice Test

Sell Structured Settlement Practice Test

Sell Structured Settlement Tax Implications 2