Tax-Free Payments for Future Money
Section 104 of the Internal Revenue Code of 1986 (IRC), as amended [also known as 26 USC §§ 104], provides that: "Compensation for injuries or sickness - (a) In general, except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical injuries, expenses, etc.) for any prior taxable year, gross income does not include - (1) amounts received under workers' compensation acts as compensation for personal injuries or sickness; and (2) the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness."
This is reiterated in the Treasury Regulations (also known as 26 CFR) §§ 1.104-1(c), which provides in part that the term "damages received (whether by suit or agreement)" means an amount received (other than workers' compensation) through prosecution of a legal suit or action based upon tort or tort type rights, or through a settlement agreement entered into in lieu of such prosecution. Unless otherwise provided by law, gross income means all income from whatever source derived. [IRC §§ 61(a).] Basically, it means that either at the time of initial settlement or at such time as you may receive payment for future money (cashing-out), the money is tax-deductible.
Brokering the Deal
Preliminary research has indicated that there are more than 400,000 individuals nationwide that have been awarded structured settlements. An important question that you should ask a broker when considering getting a lump sum payment for future money is how many underwriters will they present your transaction to? This is a very critical issue because many brokers have entered into exclusive contracts with the 'funders' or buyers of structured settlements themselves and it may limit you on the amount you receive.
Generally, these exclusive contracts limit the broker as he or she has guaranteed to use only certain buyers of structured settlements. Many brokers have been seduced into signing contracts to bring their deals directly to these particular underwriters, thus eliminating any outside competition. This certainly affects you and how much of a payment for future money you will get for the transaction. The more options you have, the more chance of getting the most out of the transaction itself. Basically, when a 'funder' knows that no one else is bidding on your transaction, they will low-ball you and try to just pay what they want, which translates into as little as possible. You should certainly check out all of your options and shop around before committing to a particular broker.
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