Sell Structured Settlement Tax Implications

Question 1

Are the original structured settlement periodic payments received by a plaintiff for physical injury taxable under US federal law?

Accepted Answer

No, they are excluded from gross income under IRC Section 104(a)(2)

Answer

Yes, fully taxable as ordinary income

Answer

Yes, but only the interest portion is taxable

Answer

Only payments above $10,000 per year are taxable

Question 2

When a payee sells their structured settlement payments for a lump sum, is the lump sum received tax-free?

Accepted Answer

No — the IRS has ruled that the lump sum may be taxable income depending on circumstances

Answer

Yes, always tax-free under IRC Section 104

Answer

Yes, because structured settlements are always tax-exempt

Answer

No, it is always taxed as capital gains

Question 3

Under IRC Section 5891, who bears the 40% excise tax when a structured settlement transfer lacks a qualifying court order?

Accepted Answer

The factoring company (the acquirer)

Answer

The payee selling the payments

Answer

The annuity issuer

Answer

The original defendant

Question 4

What is a 'qualified assignment' under IRC Section 130, and what is its tax benefit?

Accepted Answer

It allows the defendant to assign periodic payment obligations to a third party on a tax-free basis, with amounts received by the assignee excluded from income

Answer

It is the court order approving a transfer — it eliminates capital gains tax

Answer

It is a payee's election to receive tax-free lump sums

Answer

It is an IRS exemption for factoring company income

Question 5

How are punitive damages received through a structured settlement typically treated for federal tax purposes?

Accepted Answer

Taxable as ordinary income because they are not received for physical injury

Answer

Fully tax-exempt like compensatory personal injury payments

Answer

Subject to capital gains tax only

Answer

Tax-free only if received over more than 10 years

Question 6

What tax reporting form does a factoring company use to report a structured settlement transfer payment to the IRS?

Accepted Answer

Form 1099 (typically 1099-MISC or 1099-OTHER)

Answer

Form W-2

Answer

Form 1065

Answer

Form K-1