A personal injury case can take a toll on clients and their families. Recovering a settlement can relieve the stress of the litigation process and provide them with a stable source of income.
A structured settlement can greatly protect the injured party’s funds from taxes and allow a flexible distribution schedule. However, it is important to consider future expenses and goals when deciding which type of settlement plan to pursue.
Tax-Free Income
Whether you have suffered injuries in a car accident, on the job or due to the negligence of another party, a settlement can provide much-needed financial stability. However, you should know that some of the payments may be taxable.
Tax treatment of a lawsuit settlement depends on how the IRS categorizes the damage award. For example, money you receive for medical costs, loss of income, lost future earnings or pain and suffering can be taxable.
But a settlement plan can help you save taxes by allocating damages across multiple categories. This is especially important if you are a business owner or the case involves several issues and courses of conduct.
For example, you could allocate your settlement award to create a back-door Roth IRA and fund a health savings account (HSA). You can also spread payments over time and use the money to build up an emergency fund or invest in education or a home.
Tax-Free Investments
A settlement plan can help you plan your financial future by addressing your income, taxes and estate planning. This plan must be individualized to your needs and goals, especially during settlement.
A few different investment strategies can be used to achieve tax-free returns. They include HSA accounts, municipal bonds, U.S. Series I savings bonds, charitable donations and 1031 exchanges.
Money market funds are another good option for tax-free investing. They invest in short-term government notes and can offer a high degree of liquidity, but they may also be subject to alternative minimum taxes (AMT) if you live in a high tax bracket.
When choosing a tax-free investment, carefully research the returns and taxes associated with each option. You should also seek the advice of a certified accountant or financial planner to determine which options are right for you.
Long-Term Care Insurance
The expenditures of daily living activities you require as you age are covered with long-term care insurance. This coverage can be bought as a standalone or integrated into a life insurance plan.
While a long-term care policy is not a good buy for everyone, it can be helpful for those who have significant assets to protect and income to afford the premiums. However, it is important to consider your overall retirement objectives and health before purchasing.
Paying Off Debt
A settlement plan can help clients manage their money and achieve long-term financial stability. One option is to receive a series of tax-free periodic payments from a third-party company.
Another strategy is to pay off debt. This can include credit card balances, car loans, student loans and mortgages.
To make paying off your debt more effectively, create a budget to keep track of your earnings and outgoing costs. You may track how much you can afford to pay off using an app or spreadsheet.
Creating and implementing a debt repayment plan might take some time, but it will be worthwhile. You’ll be able to live freely and without ever having to worry about using your credit card again after you’ve reached zero balance status.
