If you receive an insurance payment, you may also have tax issues. Although the IRS generally does not consider compensation on claims to be income, under certain circumstances you may be required to disclose them. It is dependent on the percentage of your real losses that the insurance payout represents as a proportion of your total damages.
The first step is to determine if the payment you received is for a personal injury or sickness. If the claim arises from physical injuries or sickness, then the payments are not taxable. This includes lost wages that are paid as a result of the accident. If you have suffered property damage, then the compensation you receive should not be considered taxable income, as it is simply to reimburse you for your losses.
However, if you receive what is considered to be a “windfall” payment, then you may be required to pay taxes on the income. A windfall payment is defined as an insurance payout that is greater than the amount needed to cover your damages.
Do you pay taxes on insurance claims?
In general, you do not have to pay taxes on insurance claims. This is because the payments are considered to be compensation for your losses and not income. However, there may be some exceptions to this rule. If you receive a windfall payment (an insurance payout that is greater than your actual damages), then you may be required to pay taxes on the income.
However, if either of these is true, your insurance claim taxable income may be a problem, and you must record the reimbursement as income:
- You’ve previously claimed itemized deductions for medical expenses as a separate category on your tax return.
- The funds were allocated for something other than reimbursement for missed income.
Are insurance claim payments taxable?
No, insurance claims settlements are not taxable in most cases. This is because the payments are considered to be compensation for your losses rather than income.
If you think that you are unjustly taxed on an insurance claim, you should speak to a tax professional about your specific case. They will be able to help you determine if the taxes are warranted and, if so, how to pay them. The Oasis Firm is a tax professional company that can help you with this issue. Visit their website or give them a call today.