Hello, and thank you for your assistance.
A short summary of the issue:
1.) In 1991 I was involved in an accident. I received a lump sum and a structured settlement (periodic payments, every 5 years, beginning in 2001).
2.) In 2005 we sold - or is the right word, 'assigned' - our remaining payments to a company that purchases such (factoring company I assume). We thought we did our homework on this and were led to believe there were no tax consequences to this due to implementation of HR 2884, which we understood meant, in essence, that to avoid the excise tax penalty associated with selling our payments, HR2884 requires that all structured settlement factoring transactions be approved by a state court, in accordance with a qualified state statute. Ours was (approved by a state court). We thought that was end of the story. I now believe that HR2884 actually protects the factoring company from having to pay the excise tax, but at the same time, the language almost reads as if the law was enacted in part to protect *us* as well.
3.)2006 would have been a year for us to receive a periodic payment. We of course did not personally receive the payment because that payment was assigned to the factoring company - they received it - not us.
4.) Today we received a 1099 Misc for the payment amount in 2006. This means it must be included in OUR taxable income, even though we technically didn't receive it - the factoring company did.
This is heartbreaking because if I add up the taxable liability on the amount of the the 2006 payment and all remaining payments , then the tax liability to us may actually be equal to (if not greater) than the discounted amount we received!
In essence, we will lose money on the net transaction!
I thought we were protected, first by the fact that periodic payments as part of my structured settlement are not subject to tax liability and secondly by not having to pay a tax on the discounted lump sum amount we received due to the court process (required by HR 2884).
I have read countless articles that all suggest that HR2884 specifically states that neither the issuers, owners, nor annuitants will suffer tax consequences as a result of these types of transfers. Yet here I am, about to file income taxes with a HUGE amount to now add in to my income - and in future years, that amount will be even higher, making my tax liability worse (the payments increase in the future)!
Ironically, I would have rather paid taxes on the DISCOUNTED lump sum since it was a much smaller amount obviously.
Something does not seem right here...I received a 1099-MISC for money that I did NOT receive last year because that money was assigned to someone else. So why do *I* pay taxes on it? If, on one hand, I am the recipient of the money (and simply assigned it to someone else) then it seems logical that receipt of that money would still fall under tax-free status of periodic payments in accordance with Internal Revenue Code § 130; in that case, I could see where I might have had to pay on the lump sum in 2005, but future periodic payments would remain tax-free (but HR2884 says even the lump sum is tax free).
If on the other hand I am NOT the recipient of the money in 2006 (which I wasn't, as it went to the factoring company) then why would I have to include that in my income? How can it be both ways? I am very confused. Please help if possible.
Thank you for any advice you may offer, I am honestly do not know where to begin and am very scared.