IRS Private Letter Ruling 79-220: Your Structured Settlement and Taxes

Yes, IRS Private Letter Ruling 79-220 still applies to structured settlements in personal injury claims. This ruling, issued in 1979, provided significant clarification regarding the tax treatment of structured settlements. It established that recipients of personal injury awards paid in periodic payments can exclude the entire amount of those payments from their gross income under Section 104(a)(2) of the Internal Revenue Code (IRC). This means that periodic payments received through structured settlements are not subject to federal income tax, offering significant tax advantages for recipients.

Historical Context and Significance

The issuance of IRS Private Letter Ruling 79-220 marked a pivotal moment in the landscape of personal injury settlements. Before this ruling, there was considerable uncertainty regarding the tax treatment of periodic payments in structured settlements. The IRS clarified that these periodic payments, designed to compensate for personal physical injuries or physical sickness, should be fully excludable from gross income. This provided much-needed certainty and paved the way for the broader adoption of structured settlements.

Core Provisions of IRS Private Letter Ruling 79-220

1. Exclusion of Periodic Payments from Gross Income

The ruling explicitly states that recipients of periodic payments from structured settlements can exclude the full amount of those payments from their gross income. This provision ensures that recipients do not incur tax liability on the periodic payments intended to compensate them for their injuries.

Example: John suffered severe injuries in a car accident and opted for a structured settlement, receiving $3,000 monthly for 20 years. Under IRS Private Letter Ruling 79-220, these periodic payments are excluded from John's gross income, meaning he does not pay federal income tax on the $3,000 monthly payments.

2. Estate Payments

The ruling also addresses the treatment of payments made to the recipient's estate after their death. It clarifies that these payments are fully excludable from gross income, providing tax advantages for the recipient's beneficiaries.

Example: Jane, who had a structured settlement due to a personal injury, passes away before all the periodic payments are disbursed. The remaining payments are made to her estate. According to IRS Private Letter Ruling 79-220, these payments are excludable from the estate's gross income, offering a tax benefit to her heirs.

Key Advantages of Structured Settlements Confirmed by the Ruling

1. Tax-Free Periodic Payments

One of the most significant advantages confirmed by IRS Private Letter Ruling 79-220 is the tax-free nature of periodic payments. This tax exclusion provides financial stability and security for recipients, ensuring they receive the full benefit of their settlements without the burden of federal income tax.

Example: Mark, who settled a personal injury claim with a structured settlement, receives monthly payments of $2,500 for life. The exclusion of these payments from taxable income ensures that Mark has a steady, tax-free income stream to cover his medical expenses and daily living costs.

2. Financial Planning and Security

Structured settlements offer recipients the advantage of predictable, long-term financial planning. Knowing that their periodic payments are tax-free allows recipients to budget more effectively and ensures that their settlement funds last as long as needed.

Example: Lisa, a young mother who was injured in a workplace accident, opts for a structured settlement that provides periodic payments. These tax-free payments allow Lisa to plan for her children's education and secure her financial future without worrying about tax liabilities.

3. Protection Against Financial Mismanagement

Structured settlements help protect recipients from the risk of financial mismanagement. By receiving periodic payments rather than a lump sum, recipients are less likely to spend their settlement funds too quickly and face financial difficulties later.

Example: After a severe injury, Mike receives a structured settlement that provides quarterly payments. The tax-free nature of these payments ensures Mike has a consistent income to cover ongoing medical treatments and living expenses, reducing the risk of mismanaging a lump sum settlement.

Application of the Ruling in Modern Settlements

While the ruling was issued in 1979, its principles continue to apply in modern structured settlements. It remains a cornerstone of the tax treatment for personal injury settlements, guiding both recipients and their advisors in structuring settlements that maximize tax benefits.

Conclusion

IRS Private Letter Ruling 79-220 remains a crucial element in the landscape of structured settlements for personal injury claims. By confirming the exclusion of periodic payments from gross income, the ruling provides significant tax advantages and financial security for recipients. It continues to serve as a foundational principle for structuring personal injury settlements, ensuring that recipients receive the full benefit of their compensation without the burden of federal income tax.