Note

Secondary Market Annuities are available to individuals through our Advisor Partners. Please contact us for a referral to an Advisor near you.

Secondary Market Annuities are tax free awards to the original annuitant, per IRS regulations. As tax free income streams to the original annuitant, the Annuity Issuers  making the payments do not issue 1099’s to the recipients or to subsequent assignees.

Federal law and IRS guidelines outline how, in a properly structured transaction, a court order shows the new purchaser as the assignee of an existing payment stream by means of qualified order. This is the court process we follow on all cases.

So while under current IRS regulations you will not receive a 1099 for the income you receive, this does not mean it’s tax-free.

ANNUITY TAXATION:

As with other annuities, there is taxation with Secondary Market Annuities.  You have a basis (investment) in the asset and a gain, and therefore are responsible for income taxes.

The taxation of the SMA income is up to the taxpayer and their tax adviser to declare.  It also depends if the Secondary Market Annuity is in an IRA or not.  Generally annuities are considered ordinary income and the income vs principal is calculated using an exclusion ratio to determine (exclude) from income that amount of each payment that is return of principal.

We’ll detail the use of an ‘Exclusion Ratio’ in a moment to determine the amount of interest income vs the return of principal.  But first, refer to the following IRS rules for guidance and consult your tax adviser for specific questions.

HOW TO CALCULATE SMA EXCLUSION RATIO TAXES:

Obviously, you do have a basis in an SMA investment, and a gain on that investment.  You and your accountant can determine an exact exclusion ratio, but we’ll offer general information here.

The typical way to calculate the gain is to utilize an exclusion ratio for determining the principal and interest component of each payment.

The exclusion ratio works like this: say you paid $100,000 and will receive $200,000 over 100 payments of $2000 each.  Exactly 50% of each payment would be income, and 50% is return of principal.  Consult your adviser, but generally, this income is “ordinary income” for IRS purposes.

The exclusion ratio therefore is 50%- 1/2 of each payment is taxable income.

ALTERNATIVE METHODS:

To be fair, there are other ways to reflect a payment stream where you use an amortization schedule, and one will be provided with your Secondary Market Annuity purchase.

This method however treats the SMA like a loan (and you are the lender) and recognizes interest income predominately in early years, and principal in latter years.   This may or may not be beneficial for you. Be sure to consult your own tax adviser on taxation matters.

SMA AMORTIZATION SCHEDULES:

The software the Structured Settlement industry uses is called T-Val  and is used for calculating present value and discounted notes, as well as amortization tables for loans. With each SMA purchase, you will receive an amortization schedule produced by TVal that shows the principal and interest portion of each payment under the amortizaiton method.

OTHER TAX CONSIDERATIONS:

In the case of factored lottery cases, taxes are withheld by the state lottery commission for state and federal taxes, and you will file for an applicable state and federal refund for the taxes withheld on that portion of your payment which is return of capital (basis).

SECONDARY MARKET ANNUITIES TAXES SUMMARY:

So even though purchasers will not be receiving a 1099 for the payments from the carriers based on current tax law, what happens in the future to tax law is open to change.  Some now use an amortization schedule to calculate gains, and others use the exclusion ratio.

DCF Exchange, LLC does not offer tax advice, and this page is for general information only, so please be sure to consult your own tax adviser for more info.