If you have experienced severe damage to your home as a result of flooding, fire or wind, then you’ve probably gone through the process of filing an insurance claim with your insurance carrier. If you are one of the many that has experienced this ordeal then you know that the whole process takes months & sometimes you don’t even get fully covered by your insurance carrier. If you are one of the fortunate ones and your claim does get approved then the first question that usually comes up is, “Are the proceeds from the claim taxable & then what happens if I don’t use up all of the proceeds? Is those unused proceeds considered income?”
Generally Proceeds are not Taxable
If the settlement was for damage to physical property of your home (and not punitive type damages); the proceeds are generally not considered taxable income that would needed to be reported as such on your income tax return.
Reporting the Insurance Settlement on Your Tax Return
The only situations where you would report the damage and/or proceeds on your tax return are under the following conditions:
1) You can claim a casualty loss on your Schedule A or your itemized deductions (which if you received a settlement from insurance, it is likely you will not meet all the criteria to claim any deduction). If you do claim a casualty loss, the amount eligible for the loss is reduced by the proceeds received.
2) If you claim a casualty loss in one year and end up getting insurance proceeds in a later year, you then would need to report the reimbursement proceeds as income.
3) Lastly, if the proceeds received from insurance is greater than the basis or value of the property (which would be surprising), than the difference is a gain. This gain is taxable on your return if you do not use the proceeds to purchase replacement property.
More than likely, none of the above applies. If you had minor damage to your home which occurred in the same year you received the insurance settlement and you used the proceeds to fix your home, it would most likely not fit into any of the scenarios explained above. Thus, it would not be taxable or reportable on your tax return. It is very advisable to understand the details of your specific situation as applicable to each of these insurance settlement scenarios that I’ve listed above.