Structured Settlements Tax Treatment and Benefits of Structured Settlements

Question 1

Which Internal Revenue Code section excludes structured settlement periodic payments for physical personal injury from gross income?

Accepted Answer

IRC Section 104(a)(2)

Answer

IRC Section 72

Answer

IRC Section 130

Answer

IRC Section 5891

Question 2

The Periodic Payment Settlement Act of 1982 was significant because it:

Accepted Answer

Formally established the tax-free treatment of periodic payments in personal injury settlements

Answer

Imposed a cap of $1 million on tax-free structured settlements

Answer

Required all personal injury settlements to be structured

Answer

Created the IRC Section 5891 excise tax

Question 3

Under IRC Section 130, a qualified assignment allows the original obligor (defendant) to transfer settlement payment obligations to an assignment company. The assignment company receives:

Accepted Answer

An income exclusion for amounts received to fund the assigned obligation

Answer

A tax credit equal to the present value of payments

Answer

A federal subsidy for each payment made

Answer

A deduction equal to the full face value of future payments

Question 4

Which type of damages in a structured settlement are generally NOT excluded from the claimant's taxable income?

Accepted Answer

Punitive damages

Answer

Compensatory damages for physical injury

Answer

Medical expense reimbursements related to physical injury

Answer

Lost wages arising from a physical injury

Question 5

The 'constructive receipt' doctrine is relevant to structured settlements because it:

Accepted Answer

Would cause payments to be taxable if the claimant had the right to demand a lump sum at any time

Answer

Determines which state law governs the settlement

Answer

Requires the defendant to fund the annuity before signing the settlement agreement

Answer

Sets the interest rate used to discount future payments

Question 6

A structured settlement for emotional distress claims with no underlying physical injury would result in:

Accepted Answer

Fully taxable periodic payments as ordinary income

Answer

Fully tax-free periodic payments under IRC 104(a)(2)

Answer

Capital gains treatment on the growth portion only

Answer

A 50% exclusion under IRS Notice 95-45

Question 7

Which federal law, enacted in 1982, specifically encouraged the use of structured settlements by codifying their tax-advantaged status?

Accepted Answer

The Periodic Payment Settlement Act of 1982

Answer

The Tax Reform Act of 1986

Answer

The Employee Retirement Income Security Act of 1974

Answer

The Structured Settlement Protection Act of 2002