Is compensation for wrongful incarceration taxable?

[Zee]

The FL state Legislature passed a bill this session awarding Alan Crotzer $1.25 million, and the governor has signed it. Alan Crotzer was wrongfully imprisoned for 24 years until DNA proved him innocent. I'm not questioning the amount of morality of the payment.

Under an annuity, Crotzer, who is married and has two children, will receive an initial payment of $250,000.

He also will receive $6,700 per month for 20 years.

By receiving the money this way, Crotzer won't have to pay taxes on the $1.25 million, an attorney for Alex Sink (Florida's Chief Financial Officer) said today.

FL doesn't have a state income tax, but I wasn't aware that this type of award would avoid federal taxes. Is this correct?

[Gene V]

Zee,

I was doing a google search on damage awards, came up with a couple-interesting site.

This one is on the taxable damage of wrongful imprisonment.

http://thesettlementchannel.squarespace.com/the-settlement-channel-blog/2007/7/26/another-big-taxable-damage-case-101-million-wrongful-impriso.html

This one talks about structuring a settlement.

http://www.structuredsettlements.org/sub/frequently-asked-questions.jsp

Still not sure how they structure the award, so that it’s not taxable

[Zee]

Zee,

I was doing a google search on damage awards, came up with a couple-interesting site.

This one is on the taxable damage of wrongful imprisonment.

http://thesettlementchannel.squarespace.com/the-settlement-channel-blog/2007/7/26/another-big-taxable-damage-case-101-million-wrongful-impriso.html

This one talks about structuring a settlement.

http://www.structuredsettlements.org/sub/frequently-asked-questions.jsp

Still not sure how they structure the award, so that it’s not taxable

Thanks. I've read the links, and like you I still don't get it. A structured settlement on a taxable amount delays the tax, but doesn't avoid it, no?

[BOB W]

Thanks. I've read the links, and like you I still don't get it. A structured settlement on a taxable amount delays the tax, but doesn't avoid it, no?

The point of the structured settlement, tax wise, was to not include interest earnings on the structured settlement's annual growth of the current cash value, especially on a non-taxable award. Interest earnings over the years will still qualify as the tax free protion of the injury/sickness settlement. In a lump sum payment, all future growth will be taxable in the year earned.

[Zee]

The point of the structured settlement, tax wise, was to not include interest earnings on the structured settlement's annual growth of the current cash value, especially on a non-taxable award. Interest earnings over the years will still qualify as the tax free protion of the injury/sickness settlement. In a lump sum payment, all future growth will be taxable in the year earned.

Thanks for the responses.

Yes, I understand that much. But, it doesn't appear that a structured settlement avoids taxes?



So, it the Florida situation, how can the attorney say the say Crotzer won't have to pay taxes on the $1.25 million.

[BOB W]

Thanks for the responses.

Yes, I understand that much. But, it doesn't appear that a structured settlement avoids taxes?



So, it the Florida situation, how can the attorney say the say Crotzer won't have to pay taxes on the $1.25 million.

He can't, Federally. FL, yes. Duh!!!! Everybody wants to be a tax expert..................

Don't forget, "Interest can be substantial" on these types of settlements...thus taxes can be very high on that interest......

The other issue is the preservation of the award. Most large settlements are all gone within 5 years of the award. So taxes are not the only cost of a settlement. It creats a "spend thrift" protection.

I have a client that won an internet prize for $1,000,000. Lump sum would of been about $350,000. After taxes, he would of rec'd $200,000. He asked what should he do, Lump or structured? I told him structured because he was guaranteed 8% annual return and that was hard to beat in any market investment. He agreed with me and receives $25,000 a year>>>fully taxable, but he does not have any risk of loosing principle and he remains in his normal tax bracket not the 35%+ taxbracket on the lump.............

This happened about 8 years ago and every year he thanks me for helping him with that decission. "It would of been all gone by now", he said.

Not every issue is a tax issue. Like I tell my clients, "do what is ecomically best and if you can get a tax benefit for that choice, great> if no tax benefit you are still ahead "...................