YOU ASK:

Do you have to pay taxes on money from an insurance company for house fire, total loss?

WE ANSWER:

No, proceeds from insurance due to a loss such as a burnt house or a stolen television are not considered taxable.

One basic underlying principle of property insurance is the principle of indemnification, or payment to cover your loss. Insurance aims to protect you from a loss. With respect to homeowners insurance, you can expect protection from losses you will incur due a covered peril such as a fire, a windstorm or hailstorm.

With the principle of indemnification, you are not expected to profit from the insurance. What is being paid is just a reimbursement of what you lost. That means if you lost a television, the insurance will pay for the television. In some cases, the amount you receive may even be smaller since depreciation is also taken into account. You will also have to pay the deductible.

This means that the insurance proceeds are usually not required for reporting to the IRS. If you used the money paid by the insurance company to rebuild your house, or replace the contents that was lost, then you don't need to report what you received as taxable income.

And, even if you decide not to spend the money on its intended purpose, as long as there is no profit made in the transaction, then there is no taxable income from the insurance proceeds. For instance, you received a payment to replace a television that was stolen from your home.

As far as taxation is concerned, how the money was actually used does not matter, what matters is the purpose for which the claim was paid. If you received payment corresponding to the value of the television and you decided to just save this money instead, you can do so without the need to report the insurance proceeds.

However, there are really some cases when you need to report what you received from the insurance company as taxable income. These are when:

  • You received payment that was greater than what it actually cost to replace the property or have it repaired. The excess amount is considered taxable.
  • You are paid for a non-tangible loss, such as damages for pain and suffering or for settlement of punitive damages, you will be required to report this to the IRS.
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