How to Maximize Tax Savings on Employment Settlements
Claimants who resolve employment claims with lump sum cash settlements may face sticker shock at tax time. Most employment-related damages are taxable in the year the settlement is received. A structured settlement offers a method of deferring income taxes on the non-wage portion of the settlement and lowering tax liability while enjoying growth on the settlement proceeds.
How do structured settlements for employment claims work?
Employment settlements typically include recovery for lost wages, lost benefits, and emotional distress. While the lost wages portion of the settlement is ineligible to be structured, if the claimant chooses to structure the non-wage portion, the defendant pays the money directly to a third-party assignment company. The assignment company, now liable for the payments, purchases a structured settlement for the claimant's benefit.
Why should a claimant consider utilizing a structured settlement?
Receiving the settlement funds via periodic payments spreads out the tax liability. Between the interest gained on the annuity and the potential to maintain a lower marginal tax rate, your client may net thousands of dollars more than they would with a cash settlement.
Additionally, settling for a mix of immediate cash and periodic payments rather than a single lump sum creates a stable source of income for your client and provides protection against dissipation risk. There are a variety of financial vehicles available including annuities and market-based structured settlement programs.
Lastly, introducing a structure when negotiating an employment settlement adds flexibility and can help bridge the gap between demand and offer. To preserve the preferential tax treatment, the structure must be agreed upon as part of the settlement. Your settlement consultant will provide you with the specific language that must be included in the settlement agreement. S/he can also recommend language to include in your mediation agreement to help preserve your client’s right to structure the non-wage portion of the settlement.
Contact Sage for Assistance with Employment Settlements
For more information about employment settlements, contact your Sage consultant today.