In March 2012, BP reached a $7.8 billion settlement intended to cover claims of medical injuries, economic loss and property damage. With such a broad range of claims, it is imperative that claimants work with trusted advisors who can navigate them through complicated benefit preservation and tax code implications.
As an advocate for the civil justice system, Milestone Consulting, LLC assists numerous mass tort firms with settlement-planning advice on behalf of each of their clients, whether those clients are business owners or families.
Milestone provides individual consultation to our clients, educating them on how the acceptance of a settlement may affect and/or benefit them. You may want your claim paid in cash, but we want to let you know that you also have other options; we are here to guide you through those options.
Business Recoveries Businesses that sold or purchased products from affected areas and/or owned, operated, leased property or vessels in the Gulf Coast areas, or had business interrupted, may qualify for a claim. Tax regulations regarding settlement recoveries are handled differently for individuals than for businesses. At Milestone, we will help guide you through these regulations to determine how taxable income will affect your settlement.
Taxable vs. Tax-Free Recoveries1 Most business claims are not tax exempt, but settlement monies paid for damaged or destroyed property may be tax free if considered a “recovery of basis.” In other words, a claimant can receive up to the amount s/he originally paid for the property. If the claimant receives more in a settlement than what s/he originally paid for the property, the excess funds may be taxed. A clear understanding of the tax code and what it means for your settlement is critical in allowing you to get the recovery you deserve.
What does this mean for you? Because the settlement process is voluntary, there exists a one-time tax planning opportunity as part of the resolution of your claim. By taking settlement payments out over time, as opposed to accepting one large lump sum payment, you may reduce your taxes by remaining below the threshold for many deductions, credits and/or allowances that phase out with increased income.
What types of deductions can begin to phase out with an increased Adjusted Gross Income (AGI)?
- Home mortgage interest
- Charitable contributions
- Miscellaneous itemized deductions subject to the 2% limit, including employee business expenses
- Federal estate tax in respect to a decedent
- Impairment-related work expenses
- Amortizable bond premiums on bonds acquired before 10/23/86
- Unrecovered investment in a pension
- Repayments of income previously taxed
Case Example: You are a small business owner whose business has been affected by the BP Gulf Coast Oil Spill. Your annual company income is $100,000. Without receiving a settlement, the average federal income tax for a small business (eligible for various deductions) will be $3,700.
Upon receiving a settlement, your options to consider are:
- Lump sum (you receive a $150,000 settlement.)
- Interest earned on investing that money is fully taxable
- Any returns on traditional investments are speculative and will vary over time
- Upon receiving a lump sum payment, the average annual federal income tax due would be $49,000 ($45,300 additional tax liability)
- Structured Payments2 (using a premium of $150,000):
- Overall guaranteed benefits of $165,000.00
- The increase in annual income may allow you to remain below pre-determined thresholds, which may continue your eligibility for certain tax deductions
- The average federal income tax due would be $2,300 per year for 10 years beginning the year after settlement
- Total interest and tax benefit is $37,070
Lump Sum Net Settlement3 of $104,700 vs. Structured Settlement Net of $141,770
Personal Injury/Individual Recoveries There are a number of categories under which individual claimants or injured parties may be included, not limited to: those who live, work and/or were offered work in the Gulf Coast region during the oil spill and those who owned, leased or worked on property or vessels in the Gulf Coast region during the spills. At Milestone, we will help guide you through tax regulations and determine how they will affect your settlement.
Tax-Exempt Structured Settlements. If you were injured, you have the option to take all or a portion of your settlement funds and place it in a tax-exempt annuity. A structured settlement provides you with an open plan design that allows you to choose when and how your funds are paid in the future. You can begin to collect payments right away or you can defer payments until a point in time down the road. It allows an injured claimant an additional option not available to others to plan their financial future. Structured annuities are unique and specific to personal injury and wrongful death, so having a clear understanding on how they work can be useful in your situation and is always a good strategy.
Taxable vs. Tax-Free Recoveries. Section 104 of the Internal Revenue Service Tax (IRS) Code (Compensation for Injuries or Sickness)declares that damages for personal physical injuries or physical sickness are tax free; however, there is still much confusion over what constitutes a “physical” injury or sickness. A clear understanding of the IRS tax code and what it means for your settlement is critical in allowing you to get the recovery you deserve.
The guaranteed benefits you will receive from structuring your settlement far exceed the overall funds that you will retain if you accept a cash settlement.
Milestone is dedicated to assisting plaintiffs through the complexities of litigation and helping them move ahead with their lives. Please call Milestone for a complimentary consultation of your settlement situation. We will work closely with you and your attorney, financial advisor, and/or CPA to provide the expert advice you deserve.
If you would like to speak with someone, please call 855-836-2676.
1 – Milestone Consulting, LLC does not provide legal or tax advice. This document provides general information about structured settlements. It should not be interpreted as a source of legal or tax advice. Please consult an attorney or tax adviser if you have questions concerning the legal or taxable/tax-free elements of a proposed settlement.
2 – The structured settlement payment is an illustration only and is subject to current rates and Insurance Company approval. Actual rates used will be in effect on the date the premium is received or a valid lock is executed.
3 – Model tax returns and examples provided by Dansa & D’Arata, LLP (www.darata.com)