are insurance claims taxable income
Generally, if you're paying premiums yourself, such as for homeowners insurance and auto insurance, then your insurance benefits are not a taxable event, says Adam Sherman, CEO of Firstrust Financial Resources in Philadelphia. Your benefits are reimbursement for expenses, rather than income.. Emmet Pierce - Last updated: Jan. 15, 2016. Life insurance benefits and settlements for home and car insurance claims are generally not considered to be taxable income. As you file your taxes this year, you probably won’t have to dig out insurance-claims documents. Our attorney negotiated a small settlement with the insurance company. IRS claims we owe tax on the settlement because our attorney reported the settlement amount as nonemplyoyee compensation paid to us. I thought insurance settlements were nontaxabel income. Need help or the... show more Wife was in an auto accident. Our attorney negotiated a small settlement with the insurance company. IRS claims we owe tax on the settlement because our attorney reported the settlement amount as nonemplyoyee compensation paid to us. I thought insurance settlements were nontaxabel income. Need help or the proper publication in the tax code to cite when I respond to the IRS. In 2016, that threshold is $5.45 million. The life insurance proceeds are taxable if your estate is subject to estate tax, however, this is only true if you own your own policy. If your spouse or beneficiaries own the policy, if won’t be counted with your estate. Further, punitive damages are always taxable. If you have a punitive damages claim, your lawyer will always ask the judge or jury to separate its verdict into compensatory damages and punitive damages. Neither the federal government (the IRS), nor your state, can tax you on the settlement or verdict proceeds in most personal injury claims. Federal tax law, for one, excludes damages received as a result of personal physical injuries or physical sickness from a taxpayer’s gross income. Benefits: Generally not taxable. Insurance money you receive after a car accident or when your car has been stolen is not reported as income, says Burke. If you are repairing or replacing your personal vehicle, then you don't have to pay taxes on the insurance benefit, he notes. Compensation for Physical Injury is Not Taxable. As a general rule, the proceeds received from most personal injury claims are not taxable under either federal or state law. It does not matter whether you settled the case before or after filing a lawsuit in court. It doesn’t matter if you went to trial and won a verdict. To know if the insurance check is taxable, you'll need to figure the adjusted basis of whatever was stolen or damaged. With a house, for instance, the basis is the purchase price, adjusted for major improvements and other changes. A $10,000 kitchen remodel adds $10,000 to your basis. Benefits: Sometimes taxable. Whether disability insurance benefits are taxable depends on how you paid your premiums, says Sherman. If you pay your premiums with pretax income, then the benefits are considered taxable income, he says. If you pay the premiums with after-tax dollars, then the benefits are tax-free..
Life insurance benefits and settlements for home and car insurance claims are generally not considered to be taxable income.