Structured Settlements And Higher Taxes – What You Don’t Know

The year in question has seen one of the biggest increases to taxes. When one factors both state and local taxes, there could be many situations where individuals could end up paying 50% of their income in many cases. This is not the end and there are quite a few other tax proposals which could come your way. These include capping the exemptions and itemized deductions and so son. This will further reduce disposable income quite significantly.

People know it for sure that many states, 43 to be specific, have various forms of taxes on income. However, there are some stakes like Wyoming, Washington, Tennessee, Texas, Florida, Alaska, South Dakota and Nevada which do not have individual income taxes. In 17 states there is uniform types of county taxes which works out to around 1.55 percent. When it comes to local income taxes they come in various forms such as income taxes, wage taxes, local services, payroll taxes and occupational privilege taxes. While some are collected as a percentage of state or federal taxes, many others collect it as a percentage of income, wages or salaries. There are a few who also charge flat amounts for all.

There is something known as piggybank local tax amounting to 15 percent of the overall state tax collection. This is paid by residents of Yonkers, New York in the form of local tax. In places like New York City and Maryland when filing income tax returns, residents have to cough up money as income tax. There are around 4,943 localized jurisdictions which have the power to impose taxes.

How This Has A Relation With Structured Settlement 

As attorneys and those who handle claims are aware, when we talk about structured settlement we talk about a payment mode which provides long drawn regular payments which are also free from income tax implications. Further the payments are also guaranteed and they also help the workers to get regular payments over a period of time. The ability to accurately meet the future medical needs of the claimants is the hallmark of any good structured settlements, with tax rates going up, this certainly is a great tool for thousands of workers and other such claimants.

Let us try and look at this with the help of an example. For example, if a claimant is planning to receive a settlement amount of $400,000. It could either be paid in the form of cash or it could be paid over a period of time in a structured manner. This will help the claimants to receive tax free payments of $50,000 for a period as long as 20 years. Instead if they received the payment as a single lump sum payment and invested it elsewhere, they would have to pay asset management fees apart from paying local, federal and state taxes and even taxes on interest income. This would be a big burden to say the least. Before you sell your structured settlement you should have all of the information, pros and cons, to make the proper decision.

As taxes keep rising, it certainly starts gnawing on the investment return. Over a period of time it will put a question mark on the main purpose of such investments and it may not be able to meet their future expenses and requirements. Hence a tax free approach which is structured even with a 3 percent yield could end up putting more money in the hands of the claimants. On the other hand though you could put the lump sum money in high yielding investments, the tax, fees and other things will certainly eat it up in more ways than one.

It would be interesting to look at this with the help of an example. A structured settlement plan with 3 percent return may look very ordinary from the outside. However, when one compares this with high yielding investments which eat up 35% percent of federal tax and also other state taxes and levies, then we could have a different story to tell. After factoring the tax components which could eat up as much as 9 percent, there is nothing significant left for the claimants. Hence opting for 3% steady return with tax free benefits spread over 20 years could certainly be a better option.

Further the fact that you come under a guaranteed security umbrella makes such an investment even better to say the least. When one takes into account the tax impact, there is hardly any doubt that going in for structured settlement would always be a better options and financially more prudent than a onetime cash offer. Hence at the end of the day when a settlement offer is being decided, the objective should not be on the sufficiency of the present. It should be more about the settlement being able to take the immediate, short term and long term needs and requirements of the claimants. This is what structured settlement payments are all about.

Resources

https://en.wikipedia.org/wiki/Structured_settlement

What is a Structured Settlement?