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
Structured settlement payments for physical injury are exempt from federal income tax under which IRC section?
Answer: IRC Section 104(a)(2)
IRC Section 104(a)(2) specifically provides the income tax exclusion for amounts received through a lawsuit, settlement, or judgment on account of personal physical injury or physical sickness.
If a structured settlement includes interest earned on delayed payments, how is that interest treated for federal taxes?
Answer: Taxable as ordinary income because it represents investment return rather than injury compensation
Interest accrued within or on structured settlement payments is taxable as ordinary income because Section 104 only excludes the compensatory component, not investment earnings.
How can a payee minimize potential adverse tax consequences when selling a portion of their structured settlement?
Answer: Consult a tax professional before agreeing to the sale to understand basis and reporting obligations
Pre-sale tax planning with a qualified professional allows the payee to understand their basis, potential taxable gain, and any impact on government benefit eligibility before committing.
Which type of structured settlement payment is explicitly taxable regardless of whether it is paid periodically or in a lump sum?
Answer: Emotional distress damages unrelated to physical injury
Damages for emotional distress not originating from physical injury are taxable as ordinary income because they don't meet the Section 104(a)(2) physical injury requirement.
A structured settlement payee who is also receiving Social Security Disability Insurance (SSDI) — unlike SSI — is subject to what rule when they sell their payments?
Answer: SSDI is not means-tested, so the lump sum from a sale generally does not affect SSDI eligibility
SSDI eligibility is based on work history and disability status, not asset levels — so unlike SSI or Medicaid, receiving a large lump sum from a settlement sale does not typically disqualify a recipient.
What is the tax treatment of attorney fees paid from a structured settlement lump sum in connection with the transfer?
Answer: Generally not deductible by the payee under current tax law for personal transactions
Under current federal tax law, attorney fees in personal (non-trade or business) transactions are generally not deductible as a miscellaneous itemized deduction, following the suspension under TCJA 2017.