Tax Deferral and the Non Qualified Structured Settlement Assignment
A non qualified structured settlement assignment is a periodic payment plan that can be established in cases that do not involve personal bodily injury or physical sickness. It reduces clients’ tax burden and provides long-term financial security.
There are many ways to utilize a non qualified structured settlement assignment. Choosing the best option for your unique situation depends on a variety of factors.
Tax deferral is a powerful strategy that has long been used by investors to help grow their portfolios and reduce the overall tax burden. While tax deferral is not the only way to accomplish this, it’s a highly effective strategy that should be considered by anyone who wants to maximize their retirement savings and avoid paying too much tax in the process.
One of the most powerful types of tax deferral is foreign profit deferral. This rule lets U.S. corporations defer taxes on their offshore profits until they return them to the United States. This strategy is one of the key reasons American companies pay such low taxes by historical and international standards even though they have a marginal corporate tax rate of 35 percent.
Corporations argue that this tax rule allows them to remain competitive in the world marketplace by avoiding taxes on their overseas profits. Other developed countries have territorial systems that exempt their multinationals’ foreign profits when they bring them home. This rule is particularly attractive to U.S. corporations because they can delay paying taxes on their foreign profits for years, sometimes indefinitely, while still keeping actual investment and jobs in the United States.
The resulting tax benefit also encourages U.S. corporations to form subsidiaries in foreign countries that don’t tax their profits, which is also a good thing for the United States because it helps keep our economy strong.
Another powerful tax deferral is Social Security and Medicare tax deferral. This deferral, which is allowed under section 2302 of the CARES Act, allows household employers and self-employed individuals to deposit some or all of their employer share of Social Security and Medicare tax withholding and make estimated tax payments for future years.
Self-employed individuals, in turn, can use this deferral to postpone paying income tax withholding on their wages and other sources of income. In addition, they can use the tax deferral to pay FFCRA paid leave credits or the employee retention credit on a refund or credit basis.
The resulting tax benefits are significant, but there are some potential risks. For example, it’s possible that the assignment company in which the structured settlement payment stream is assigned may be non-natural persons under IRC 72(u). That could put the client in violation of the annuity ownership requirement in IRC 72(u). To minimize these risks, the client should consult with a qualified financial advisor to ensure that they are establishing a structure that meets all IRS regulations.
Having your settlement in an annuity can give you peace of mind and the opportunity to invest those funds prudently and safely. The best part is you will have a steady stream of payments from the same company for the rest of your life.
There are several ways to invest your structured settlement proceeds to get the most bang for your buck and maximize your tax return. The first is to have a structured settlement advisor build you an investment portfolio.
Another option is to have the proceeds of your structured settlement pooled together in an insurance company backed mutual fund or a robo-advisory product. The third way to use your settlement monies is to have the money transferred directly to your bank account or to an investment trust. The last and probably the most logical route to take is to have a non qualified structured settlement assignment made possible by a structured settlement funding entity such as a structured annuity, private placement annuity or a hybrid fixed indexed annuity with some type of deferred income option.
In short, a good structured settlement adviser can provide you with a structured settlement solution that will benefit your family for years to come and may even help you win the biggest case of your lifetime. The most important step is to understand your options and to select the right one for you.
Taxes on Payments
A non qualified structured settlement assignment is a periodic payment plan that helps plaintiffs with taxable settlements to pay taxes on just the amount they receive in payments instead of the entire lump sum. This strategy helps reduce a plaintiff’s tax burden and provides them with lasting financial security.
Structured settlements are a good choice for clients with disabilities because they offer guaranteed payments that help to ensure an income stream regardless of their finances and abilities. They also help to preserve a client’s eligibility for important government benefits.
However, some plaintiffs may be concerned about the possibility of being taxed on their settlement awards. This is especially true if the settlement includes amounts for emotional distress, slander or libel, punitive damages, business disputes, alimony or child support, attorneys’ fees, or other types of taxable damage claims.
If a settlement includes these types of damages, the plaintiff’s one-time award will be included in their ordinary income in the year they receive it, which could put them into high marginal tax brackets. If the damages include wages, the plaintiff would be taxed at their highest tax bracket as well.
As a result, it is common for plaintiffs to opt for a structured settlement over a lump sum. This is because a structured settlement allows the plaintiff to grow their settlement tax-deferred and avoid paying taxes on the entire large lump sum immediately.
A structured settlement is also a better option for cases that don’t involve personal bodily injury because it allows the plaintiff to spread their funds into periodic payments and avoid paying a large tax bill in a single year. As the payments are received, they are deposited into an investment account where they earn interest.
In some cases, the plaintiff can even take a tax deduction on their entire structure. This is particularly true if the claimant can prove they have a financial hardship.
If a plaintiff receives a non-qualified structured settlement, they should speak with a settlement planner who is knowledgeable about the tax implications of such a settlement. The settlement planner can then establish an NQA that meets the needs of the plaintiff and helps them achieve lasting financial security.
Taxes on Annuities
Annuities can be a great way to get a tax-free lump sum payout. However, it’s important to understand how taxes work with annuities. There are a number of ways that annuities can be taxed, and the exact amount you pay depends on a few factors.
The first factor is where you got the money to buy your annuity. If you bought it with pre-tax funds, it’s called a qualified annuity and you won’t owe tax on the premium.
If you bought it with post-tax money, it’s a non-qualified annuity and you will owe taxes on the premium. This is because the IRS considers your purchase money, or basis, to be taxable income and the interest earnings on that money to be taxable capital gains.
Another factor that will affect how much you owe in taxes is how your annuity was structured. Some annuities are deferred until you retire, while others are immediate and begin paying out immediately. These are known as period annuities and lifetime annuities, respectively.
A deferred annuity can be purchased with either pre-tax or post-tax funds, but it is important to note that the IRS considers any withdrawals made from a deferred annuity before age 59 1/2 to be subject to a 10% early withdrawal penalty.
In addition, you’ll have to pay taxes on any interest and earnings earned before the time you tapped into your deferred annuity account. The IRS determines which part of the distribution represents gains and which is principal by using a calculation called an exclusion ratio.
This calculation involves your principal investment, how long you have had the annuity and your earnings. The results are used to determine what percentage of your annuity payments is taxable and how much isn’t.
This is a complex issue and the IRS has several publications that can help you understand how annuity taxes apply to you. If you have any questions, contact a financial advisor or a certified public accountant for help.
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