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Minneapolis Tax Lawyer | Tax Consequences of Selling a Structured Settlement

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Are your structured settlement payments taxable?

For federal income tax purposes, it is not relevant whether a plaintiff receives proceeds from a judgment or settlement. No matter how the result is reached, amounts received are characterized either as income, or are specifically excluded from income. Section 104 of the Internal Revenue Code generally excludes from gross income: amounts received as personal injury damage awards (to the extent that the damages are compensatory and not punitive); amounts received through accident or health insurance for personal injury or sickness; and amounts received as pension, annuity, or for personal injuries or sickness resulting from active service in the armed forces of any country. Punitive damages are almost always included in gross income. Essentially, judgments resulting from personal injury lawsuits and the like are meant to make a plaintiff whole and compensate them for something that they lost that was not income (e.g. loss of an arm), therefore any amount received in compensation of such an injury also must not be income.

If your settlement payments are not covered by Section 104, you need to determine if your structured settlement payments must be included in your income by considering the item that the settlement replaces. Business injury or non-personal injury judgments are generally regarded as gross income. Here are a few examples of judgments usually included in gross income: interest on any award; compensation for lost wages or lost profits in most cases; punitive damages (in most cases); pension rights (if you did not contribute to the plan); damages for patent or copyright infringement, breach of contract, or interference with business operations; and back pay and damages for emotional distress received to satisfy a claim under Title VII of the Civil Rights Act of 1964.

Structured periodic payments for business injury judgments or settlements should generally be included as income to the extent that the payments fit under the definition above. With respect to the personal injury plaintiffs, Section 104 explicitly excludes from gross income periodic payments that are otherwise excluded from gross income. Portions of periodic payments specifically labeled as interest may not be excluded from gross income. If properly structured, personal injury settlement payments can be tax free generally irrespective of the number of years the payments continue.

A note of caution, the analysis above is very general and simplistic, even with respect to the examples provided above. You should consult your tax attorney to determine whether your settlement should be included in gross income pursuant to Section 104.

What happens if you sell your right to structured settlement payments for a lump sum?

The information above is very important to an original beneficiary of a structured settlement who may be interested in selling their right to receive structured settlement payments. This is because Section 104 still controls characterization of any lump sum payment received in return for transferring the right to structured settlement payments. The end result is that any lump sum payment you receive from selling your structured settlement payments is likely to have the same tax treatment as the payments under the structured settlement.

Therefore, if the current structured settlement payments you receive are tax free, then the money you receive from selling your payments are likely to be tax free. Conversely, if the current structured settlement payments you receive are are likely to be included in your income, then the money you receive from selling your right to payments are also likely to be included in your income.

Again, the exact determination of whether the proceeds from the sale of a structured settlement need to be included in the gross income should be made by a tax attorney. Only a tax professional is likely to have the expertise necessary to take into account all factors of your particular tax situation and conduct correct legal analysis.

Are there tax consequences for the company purchasing the right to your structured settlement payments?

Section 5891 of the Internal Revenue Code was added in 2002 to protect structured settlement payees/recipients that decide to sell the right to their structured settlement payments. Section 5891 requires the sale of structured settlement payments must be approved by a qualified court order in accordance with the relevant state statute. In Minnesota, the applicable state statute is Minn. Stat. §549.31 (2010).

Section 549.31 requires among other things that: the transfer is not unlawful; the transferee discloses certain facts to the payee in writing; the payee has established that the transfer is in the best interests of the payee and the payee’s dependents; the payee has received independent professional advice regarding the legal, tax, and financial implications of the transfer; the transferee has given written notice of the transferee’s name, address, and taxpayer identification number to the annuity issuer and the structured settlement obligor and has filed a copy of the notice with the court or responsible administrative authority; and that the transfer agreement provides that any disputes between the parties will be governed, interpreted, construed, and enforced in accordance with the laws of Minnesota and that the domicile state of the payee is the proper place of venue to bring any cause of action arising out of a breach of the agreement. The transfer agreement must also provide that the parties agree to the jurisdiction of any court of competent jurisdiction located in Minnesota.

If a sale of the right to payment under a structured settlement does not comply with Section 5891, then Section 5891 imposes on any person who acquires directly or indirectly structured settlement payment rights in a structured settlement factoring transaction a 40-percent excise tax.

Conclusion

Tax consequences of selling a structured settlement should be analyzed by a tax professional who will be able to conduct proper legal analysis based on the particular facts of your case. Sherayzen Law Office can help you analyze your case and provide an independent advice on the legal and tax consequences of the sale.  Call us to discuss your case with an experienced Minneapolis tax lawyer!

Business Tax Lawyers | Certain End-of-Year Tax Deadlines and Reminders (2010)

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The following are some upcoming tax deadlines and reminders for the December of 2010. (This list may not include all applicable tax deadlines for your situation, and does not constitute tax advice; please, consult Sherayzen Law Office for more information and assistance with your tax planning needs.)

Selected General Deadline Reminders for Individuals: December 31, 2010

Traditional IRA to Roth IRA Conversion. Last date for taxpayers to convert a traditional IRA to a Roth IRA for the tax year 2010 (provided a taxpayer meets the other applicable criteria).

Keogh plan deadline. Keogh plans must be established by the last date of the year (December 31, for calendar year basis taxpayers) in order for contributions to be deductible for the tax year 2010.

Capital Gains and Losses. Capital gains and losses for individual taxpayers are determined by the last trading date of the tax year. This is the case even though the settlement date (the date the shares-sold are actually exchanged and cash is received by the broker) may be several days later. Thus, even though the settlement date may occur in early 2011 for shares sold on the last trading date of 2010, the capital gains and/or losses will be established in 2010.

Short Sale Gains (But not Losses). Gains on shares sold short are also determined by trading date because of an IRS ruling treating the transaction as a constructive sale. Thus, shares sold short for gain on the last trading date of 2010 will be treated as capital gains for the tax year 2010, even though actual delivery of the shares may occur in 2011. Note, however, that for losses on shares sold short, the losses are not deductible until the shares are actually delivered to a broker. Taxpayers should plan accordingly if a loss is anticipated.

Marital Status. Taxpayers should note in general that marital status as of the last date of the year will determine the status for the entire tax year 2010.

General Tax Calendar Deadlines and Information (From IRS Publication 509)

December 10: Employees who work for tips. If you received $20 or more in tips during November, report them to your employer. You can use Form 4070.

December 15: Corporations. Deposit the fourth installment of estimated income tax for 2010. A worksheet, Form 1120-W, is available to help you estimate your tax for the year.

Selected Tax Deadlines for Employers Based on Monthly Deposit Rule

Social security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in November by December 15, 2010.

Non-payroll withholding. If the monthly deposit rule applies, deposit the tax for payments in November by December 15, 2010.

Employer’s Tax Deadlines: Payroll Due Dates for Deposit of Taxes for 2010 Under the Semiweekly Rule

Nov 24-26: Dec 1
Nov 27-30: Dec 3
Dec 1-3: Dec 8
Dec 4-7: Dec 10
Dec 8-10: Dec 15
Dec 11-14: Dec 17
Dec 15-17: Dec 22
Dec 18-21: Dec 27
Dec 22-24: Dec 29
Dec 25-28: Jan 3
Dec 29-31: Jan 5

Excise Tax Deadlines

December 10: Communications and air transportation taxes under the alternative method. Deposit the tax included in amounts billed or tickets sold during the first 15 days of November.

December 14: Regular method taxes. Deposit the tax for the last 15 days of November.

December 28: Communications and air transportation taxes under the alternative method. Deposit the tax included in amounts billed or tickets sold during the last 15 days of November.

December 29: Regular method taxes. Deposit the tax for the first 15 days of December.

Have more questions about tax deadlines, or need help in planning for your year-end tax decisions? Call Sherayzen Law Office to discuss your tax situation with an experienced tax lawyer!

Depreciation Deductions: Passenger Cars & Light Trucks, Vans and SUVs

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Assuming that a taxpayer does not use the IRS standard mileage deduction, for qualifying vehicles used for business purposes and placed in service in 2009 or 2010, taxpayers may deduct various costs including depreciation, registration fees, insurance, and many others under the actual expense method. This article will examine depreciation deductions for certain categories of vehicles.

Passenger Cars

For purposes of calculating depreciation, a car is defined to be any four-wheeled vehicle for use on public roadways, with a gross vehicle weight of 6,000 pounds or less (subject to certain exceptions). Under the American Recovery and Reinvestment Act of 2009, taxpayers may generally take bonus depreciation of $8,000 for newly purchased cars placed in service for business use in 2009 (Congress has extended the bonus depreciation for 2010, as well). Taxpayers may take an additional $2,960 maximum depreciation deduction for 2009 ($3,060 for cars purchased and placed in service in 2010). The 2009 depreciation rates for subsequent years are as follows: $4,800 for the second year; $2,850 for the third year; and $1,775 for each tax year thereafter. Depreciation limits are periodically adjusted for inflation.

Note that the above depreciation amounts assume 100% business use. Depreciation amounts must be reduced proportionately by any personal use percentage that is less than 100% business use and more than 50%. If business use is less than 50%, straight-line depreciation must be used (also reduced proportionately by personal use percentages) and the bonus depreciation amount is not available. Bonus depreciation is also not available for purchases of used cars.

Light Trucks, Vans and SUVs

A light truck, van or SUV that has a gross vehicle weight of 6,000 pounds or less may also qualify for certain depreciation deductions. As with passenger cars, an $8,000 bonus depreciation allowance is available for newly purchased vehicles in this category placed in service in 2009 or 2010. For 100% business use, taxpayers may generally take an additional $3,060 maximum depreciation deduction for 2009 ($3,160 for 2010). 2009 Depreciation rates for vehicles in this category for subsequent years are as follows: $4,900 for the second tax year; $2,950 for the third tax year; and $1,775 for each tax year thereafter.

As with passenger cars, depreciation amounts must be reduced proportionately by any personal use percentage that is less than 100% business use and more than 50%. If business use is less than 50%, straight-line depreciation must be used (also reduced proportionately by personal use percentages) and the bonus depreciation amount is not available. Bonus depreciation is also not available for purchases of used vehicles in this category.

Do you have questions about maximizing your tax savings on newly purchased business vehicles or equipment? Sherayzen Law Office can assist you with your tax needs.

Call NOW  to discuss your case with an experienced tax attorney!

Business Tax Planning Lawyers: When to Schedule a Review with Your Business Tax Lawyer

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While the exact schedule of your business tax planning reviews may often depend on the exact nature of your business, I want to point out in this article certain events which should trigger a review of your tax strategies by a Minnesota business tax lawyer.

A. Business Formation

A review of your business tax strategies should be scheduled during business formation or at least within several months of your company’s existence. Unfortunately, a lot of business owners neglect obtaining the advice of a business tax attorney during the first year of the existence of their businesses. The anxiety over what the future might bring and the desire to cut costs are usually proffered as the explanation of this tendency.

Yet, this is a mistaken view. In reality, it often leads to a completely opposite result: more money is being spent inefficiently, higher tax costs are incurred, and there is a higher likelihood of creating huge legal and tax liabilities down the road. A company may even go out of business due to its neglect of legal and tax planning.

One of the main functions of a business tax lawyer is to structure business transactions in such a way as to fully comply with U.S. tax laws (and the laws of other relevant tax jurisdictions where appropriate) while making sure that full advantage is taken of these laws to reduce and even eliminate business tax waste. For example, where appropriate, a business tax attorney may advise to hasten a purchase order in order to reduce tax liability in this tax year. If the purchase is being made in a foreign country, this business tax lawyer may advise that the contract is signed in that foreign country in order to offset foreign income that the company received from the sales of its product in that country. This may further favorably impact the situation with respect to the foreign tax credit.

B. One Month Prior to the End of a Fiscal Year

The next tax planning session should be scheduled about a month prior to the end of each fiscal year. By this time, sufficient economic data about the performance of the business should be collected by the company’s accountant. This will allow your business tax lawyer to review the assumptions about income and expenses that were made at the beginning of the fiscal year. Based on this review, the business tax attorney may revise the tax planning strategies and give advice on what to do during this last month of the fiscal year to make sure that full advantage is taken of the Internal Revenue Code provisions.

C. Business Tax Filing

In order to maximize its benefits, business tax filing should consist of three steps. First, the accountant prepares a tax return for the business. If you use your tax attorney to prepare the tax return, then you can skip this step. Second, prior to filing the tax return, submit it for a review to your business tax lawyer. Following this step may bring two important benefits: a.) you get a “second opinion” on the tax return, and b.) the tax lawyer may modify the tax return in order to harmonize it with the rest of the business and tax planning strategies (which may sacrifice short-term benefits in order to achieve your company’s long-term business goals or reduce overall long-term tax liability). Finally, the third step is to use the already filed tax return in conjunction with the economic analysis and projections for the next fiscal year in order to formulate a new business tax plan. This new tax plan will later be reviewed at the end of the year as indicated in Section “B” above.

Thus, in reality, your business tax planning strategies should be reviewed at least twice a year by your tax attorney: while filing the tax return and at the end of the year. This holds true unless there is a material change of your company’s circumstances.

D. Material Change of Circumstances

Every time an event occurs that may materially modify the tax situation of your business, it is necessary to immediately contact your business tax lawyer to review the tax situation and tax strategies of the business. Moreover, it is important to remember that such situations are likely to give rise to additional tax compliance and legal liability issues which may be identified only by a tax professional.

E. Conclusion

Business tax planning should become a natural and routine practice of your overall business planning. In the long run, the benefits of tax planning are likely to far outweigh whatever immediate legal expenses your business may incur, not to mention the protection it offers against future legal liability. At the very least, two reviews of your business tax strategies should be scheduled during a fiscal year: when you file your business taxes and about a month before the end of the year. If an event occurs that may materially change the tax situation of your company, then an emergency tax and legal liability session with your business tax lawyer should be scheduled.

Sherayzen Law Office can help you throughout this process. We can help you properly analyze your business tax situation, identify the problems and opportunities, and adopt the right business and tax strategies to take full advantage of the U.S. tax laws while reducing potential future liabilities.

Call to discuss your tax situation with Mr. Sherayzen an experienced business tax lawyer!

Section 179 Deduction for SUVs and Certain Other Vehicles

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Section 179 of the Internal Revenue Code allows taxpayers to purchase certain types of vehicles for business purposes and write off the cost. Specifically, taxpayers may expense up to $25,000 of the cost of any “heavy” SUV, pickup or van placed into service during the tax year, and used for over 50% for business purposes. Both new and used vehicles may qualify for the deduction.

A heavy vehicle for the purpose of the statute is generally any 4-wheeled vehicle with a gross vehicle weight above 6,000 pounds and not more than 14,000 pounds. Certain other specified vehicles are not subject to the $25,000 limit. For qualifying heavy vehicles, taxpayers may take regular depreciation (20% for the first year) in addition to the $25,000 write-off. However any percentage of non-business use below 100% must be reduced accordingly by the same percentage.

Call NOW to get help with your business tax return!