Today, I want to answer the million dollar question: “are insurance claims tax deductible?” This information was collected from independent research online. Please keep in mind I am NOT an insurance agent, CPA or attorney.
Insurance Claims are not tax deductible, but losses not covered by insurance are tax deductible. Any portion of your claim not covered by insurance can be deducted with a few guidelines.
If your personal property is damaged by a casualty such as fire, lightning, windstorm, or hail, or is stolen, damaged, or destroyed you may be able to claim the loss on your taxes. Use the IRS form 1040 to itemize your deductions to claim a loss from an insurance claim.
If you suffer damage/loss, the amount that you can claim is either the resulting decrease in fair market value of the property or the Adjusted Basis in the property before the loss (whichever is smaller) – Adjusted Basis is your cost, increased by capital expenditures or decreased by depreciation deductions.
The Fair Market Value of the property just prior to the loss is what you could have sold it for on the open market. Figuring the decrease in the Fair Market Value can be done with an appraisal or the cost of actual repairs. If the item was stolen the resulting fair market value is $0.
Adjusted Basis is the measure of your investment in the property you own. For property you buy, your basis is the cost to you. Additions or permanent improvements to the property can increase the Adjusted Basis. Earlier casualty losses and depreciation deductions can decrease your basis. After determining the smaller figure, you subtract the insurance reimbursement.
“For example, assume a fire severely damaged your home. You had bought the house for $50,000 (adjusted basis) a few years ago, and it was appraised at $75,000 before the fire. It was worth only $15,000 after the fire. Your insurance company paid you $45,000 for the loss. Here’s what you do:
Adjusted basis in the property before the loss: $50,000
Decrease in property’s FMV: $60,000 ($75,000 minus $15,000)
Loss: $50,000 (smaller of 1 or 2, above)
Subtract insurance reimbursement of $45,000
Amount of loss: $5,000”
From the amount of loss there is a $100 deduction for each occurrence.
“You must reduce each casualty or theft loss by $100 when figuring your deduction. Apply this rule to personal-use property after you have figured the amount of your loss.” IRS.Gov
In the example above you would take $5,000 and reduce it by $100, so the deduction would be $4,900.
After the $100 rule has been applied, the claim deduction must be reduced by 10% of your Adjusted Gross Income.
“You must reduce the total of all your casualty or theft losses on personal-use property by 10% of your adjusted gross income. Apply this rule after you reduce each loss by $100” IRSZilla.com
Are Insurance Claims Taxable Income?
Generally, Insurance Claims in the United States are not considered taxable income. In some circumstances you do have to declare the income on your taxes.
“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.” Michelle Lerner/BankRate
When you are involved in an accident there are several aspects to the claim you file: Property Damage, Personal Injury, and Medical Expenses. The Internal Revenue Service does not consider Personal Injury taxable income under any circumstances.
Medical Expenses reimbursement may require an adjustment on your taxes. If you deducted medical expenses related to the accident on your taxes, you will need to amend the deduction when you receive payment for your medical expenses.
Property Damage from an accident or homeowners claim may be taxable income.
“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.” Tom Streissguth/Zacks
Property Damage settlements can affect the Adjusted Basis cost of property, when you sell the vehicle or property there may be tax liability then. If you receive more from the insurance settlement than the value of the property, the excess over the property value could be taxed as capital gains, depending on the amount and current tax laws.
Settlements for lost wages, punitive damages, and emotional distress are considered taxable income. The IRS views lost wages settlements as income you would have paid taxes on had you been able to work.
“Additionally, short- and long-term disability insurance proceeds, which are both designed to provide you with income if you’re unable to work, are taxed the same way income is. You’ll need to report these payments as earnings when you’re filing.” ValuePenguin
There are a few stipulations on Long- and Short-Term Disability income taxes. If both you and your employer pay the premium for your disability insurance, only the portion of the benefit that your employer pays for is taxable. If you pay the premium and your employer does not contribute, you do not owe taxes on disability income.
If your disability income is through a cafeteria plan and you do not include the amount of premiums as taxable income to you, it is considered an employer paid plan and the disability income is taxable.
Are Insurance Claims Taxable Income in Canada?
Automobile accident damage payouts are not taxed in Canada. The Canadian Revenue Agency is straightforward in their rules about Automobile accidents.
“The Canada Revenue Agency does not treat compensation for motor vehicle accidents as taxable income.” Vladimir Zhivov/Zhivov Personal Injury Law
Pain and suffering and medical payouts are not taxable in Canada. Whether they are in one lump sum or a structured settlement paid over time. For structured settlements to remain tax free certain conditions must be met:
- The award must be made in respect to personal injury or death
- Plaintiff and insurer must agree on what schedule the money will be paid out at
- The insurer must purchase an annuity contract that is nontransferable, non-commutable and non-assignable
- The insurer will remain liable to make payouts according to the agreed settlement.
Property damage claim payouts are also tax free in Canada. Payouts for damage to your property or theft of your property are not taxable by the Canadian Revenue Agency.
Disability Insurance payouts can be taxable, depending who paid the insurance premiums.
“The general tax rule is that if you paid the premiums under the disability insurance policy, any periodic disability payments will be tax-free. But, if your employer pays the premiums under the DI policy and does not report them as a taxable employment benefit to you, any benefits received in the future will be fully taxable.” Brent Lewin/Bloomberg Files
Are Insurance Claims Taxable Income in the United Kingdom?
Property and Casualty claims payouts, auto and homeowners, are not taxable income in the United Kingdom. Claims payouts from insurance that you paid for with post-tax income are not generally taxed.
“In the UK there is no table for assessing bodily injury claims. The courts judge the cases based on precedents and the particulars of the individual case. However, in 1992 an important judicial education institution developed guidelines.9 These are revised regularly and have become the most widely used instrument to calculate compensation for bodily injury claims. These so-called “JSB Guidelines” prescribe a certain compensation range for each injury, including both pain and suffering (non-economic damages in the widest sense) and every other form of non-economic loss.” Lorenzo Vismara (Milan)/Genre.com
Pain and Suffering and medical payouts in the United Kingdom are not taxed. Medical payouts in the UK are split between lump sum and annuities, with no further stipulations.
Death Benefits for anyone killed in an auto accident paid by the government are also not taxable.
“In the UK, non-economic damages always total EUR 13,686 (GBP 11,800). This lump sum is fixed currently as the so-called bereavement damage. It is due as a one-off payment and divided among the beneficiaries explicitly named in the law:6 in case of the death of a child under 18, only the parents; if the victim is married, only the spouse.” Lorenzo Vismara (Milan)/Genre.com
Disability Insurance are not taxable, if the premiums are paid with taxed income.
“Payments received from policies taken out to protect a person from sickness, disability or unemployment will generally be tax free where the premiums were paid out of taxed income.” GOV.UK
In the United Kingdom no property or liability insurance settlement is taxed, but some disability income is taxed.
Are Insurance Claims VATable?
Insurance claims are subject to VAT.
“AXA Insurance, provided the following statement: “If a customer is VAT registered (or partially registered), they can recover VAT from HMRC in the normal way.
“So, an example here is an invoice for repair of £1000 plus VAT (where the excess on the policy is £200). In this case, we pay £800 (and the customer pays the repairer the £200 excess, plus the VAT – another £200).” Licensed Transport Uncovered
If you are under a flat rate VAT you will be unable to recover the VAT from the HRMC and your insurance company should not charge you for that cost.
Large settlements can be a burden for small businesses. In these cases the VAT is charged each time the insurance company makes a payout, allowing the business to break the charges up in to many smaller payments.
With first party liability claims the type of payout effects how the VAT is charged:
“AXA then went on to raise the difference in the type of settlements available to policyholders, specifically cash settlements. The spokesperson said: “It’s a bit different when the customer elects not to have the damaged item repaired or replaced and instead opts for a cash settlement. In this case, no VAT is going to be incurred, (as no service will have been performed on their behalf), so VAT would not feature.” Licensed Transport Uncovered
Property Damage claims incur VAT if the property is not demolished and rebuilt. At the current 20% rate this can be a significant amount for the insured in large property claims.
“However, an insurance claim often is filed for only partial damage to a property, and a total rebuild is not necessary. In such situations, VAT typically will apply to the repair costs. As that VAT is unlikely to be recoverable, the costs of such a claim will rise. With the increase in VAT, debate around the economics of repairing or rebuilding will likely become more common. “ David Damsell
There are some reliefs for VAT on property claims – if a building has been empty for more than 2-years, is a ‘relevant residential’ property such as student housing or a home, or is a ‘charitable’ building such as a church. In these cases the VAT is reduced from 20% to 5%.
It’s important that adjusters be aware of the VAT rules; the supplier deems the amount of VAT, but it is the responsibility of the adjuster to verify it is correct. Solid knowledge of VAT and the rules surrounding the reliefs can save insured’s significant premium.
“VAT incurred in insurance claims can be significant, especially for property-related expenditure. It is important for both insurers and their appointed loss adjusters to ensure that maximum relief is obtained whenever possible. They also should not assume that the supplier has determined the correct VAT liability. Actual VAT savings can be achieved by understanding the relief available, using loss adjusters with significant VAT knowledge and, in complex scenarios, utilizing the knowledge of external VAT advisors.” David Damsell
In summary, these are our answers to “are insurance claims tax deductible?” Any sources we used are cited in the article. Before making the decision as to whether or not you can deduct something, please seek out the advice of a CPA or licensed tax professional. They will be on the up and up about what you can and what you cannot deduct.
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