If you have an insurance settlement coming, you may have tax issues as

If you have an insurance settlement coming, you may have tax issues as
well. Although as a general rule the IRS does not consider payments on
claims as income, under some circumstances you may have to declare
them. It depends on the amount you receive from the insurance company
as a percentage of your actual damages.



Personal Injury and Medical Expenses
If you're involved in an accident, there are several components to the
insurance claim you file: compensation for personal injury, medical
expenses and property damage. The IRS does not consider personal
injury payments as taxable income under any circumstances. If you
deduct medical expenses related to the accident from your income, you
have to adjust the deduction if you later receive payments from the
insurance company for those expenses. Property damage payments may be
taxable; it depends on how much you receive.

Property Damage Claims
If you receive insurance money for damage to your car, the IRS does
not consider that taxable income. Instead, you have received an
adjustment to the cost basis you have in the property. Therefore, if
you paid $20,000 for the car, and receive $5,000 for damages, your
cost basis is now $15,000, which only affects your taxes when you sell
the vehicle. Any money you receive over and above the cost basis
amount when you sell is considered a taxable capital gain.

Excess Amounts and Other Payments
If somehow you manage to win a claim that exceeds the value of the
insured property, then you have an IRS issue. You have to declare the
excess amount as income and pay taxes on that income at whatever your
individual tax rate is. In addition, any insurance claim you win for
lost wages is taxable, the IRS theory being that you would have had to
pay taxes on the income if you had actually worked for it. Other
payments for emotional distress or punitive damages are also taxable.

Disaster Losses
If you've suffered a loss in a natural disaster, the important number
to remember is your basis in any insured property: the amount you
originally paid for it, adjusted to reflect the value of any
modifications or improvements. An insurance adjuster will determine
the loss you've suffered and settle on fair compensation. However, if
the payment is greater than your basis, then in the eyes of the IRS
you've enjoyed a taxable gain. You can deduct any loss that was not
covered by insurance.

Federal Disaster Areas
If your loss occurred in an area declared a federal disaster area, you
can also delay reporting the taxable gain by reinvesting the claim
money in replacement property up to four years from the year you
received the insurance settlement; that period is extended to five
years in certain areas, such as those affected by Hurricane Katrina in
2005 and the Kansas tornadoes of 2007. The IRS will not tax any
insurance proceeds received for damage or loss of "unscheduled"
personal property such as furniture, books, jewelry, clothing and the
like.