Tax Implications Flashcards
6 cards from real Sell Structured Settlement practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Tax Implications flashcards as text
A structured settlement designed to compensate for lost wages — rather than physical injury — is treated how for federal income tax?
Answer: Taxable as ordinary income because lost wages are not excludible under Section 104(a)(2)
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.
If a payee sells structured settlement payments at a gain relative to the tax basis, what type of tax may apply?
Answer: Capital gains tax
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.
What is the tax basis of a structured settlement payee's payment rights for purposes of calculating gain on a sale?
Answer: Zero, because the payments were received tax-free
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.
Does the sale of a structured settlement for a lump sum affect the payee's eligibility for means-tested government benefits such as Medicaid?
Answer: Yes — receiving a large lump sum can disqualify a payee from Medicaid or SSI due to asset limits
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.
Which professional is best qualified to advise a structured settlement payee on the potential tax consequences of selling their payments?
Answer: A licensed tax attorney or CPA familiar with structured settlement transactions
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.
What is a 'structured settlement annuity qualified assignment' company (QAC)?
Answer: A special-purpose entity that assumes the periodic payment obligation from the defendant under a qualified assignment
A QAC is typically a subsidiary of a life insurance company that accepts the assignment of periodic payment obligations from defendants, allowing them to fund them with annuities under IRC Section 130.