Q: I am getting a settlement and want to know if this will be taxed? what is my best option lump sum or structure or?
It says ( the settlement ) I can receive it in one lump sum ,or structure some or all of my settlement proceeds for financial planning and tax reasons, or put in a trust to protect my Medicaid, ssi or other needs- based government benefits. I am 63 and not taking Medicare yet but my husband is and we file jointly. I want to know the best way to take it without being taxed to death.
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A:
When receiving a settlement, the tax implications depend on the nature of the settlement. For instance, compensatory damages for physical injuries are generally not taxable, but punitive damages, interest, and settlements for lost wages typically are. The structure of how you receive the settlement—lump sum or structured payments—can also influence your tax liability and eligibility for government benefits.
A structured settlement can spread the income over several years, potentially lowering your taxable income each year and helping you manage your finances more effectively. This approach may also help protect your eligibility for Medicaid, SSI, or other needs-based benefits. If you opt for a lump sum, it could push you into a higher tax bracket in the year you receive it, which could result in a significant tax burden.
Putting the settlement into a trust could be beneficial if you’re concerned about protecting your government benefits and managing the funds responsibly. It’s important to consider how the settlement will impact your overall financial picture, including your future Medicare plans and any other income sources you may have.
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