While casualty losses can provide deductions on your income tax, insurance benefits you receive from a loss are not considered taxable income in most situations. Insurance money is intended to restore property to the condition it was in before the loss. In addition, in many cases, you can deduct the amount you incur in a casualty loss from your income taxes.
Casualty insurance payments are intended to restore your property to the state it was in before you experienced the loss. Since you are just restoring property that you already own, which you paid for with taxable dollars, these payments are not taxable, unless your payments exceed the loss you have experienced.
Casualty losses are deductible on your income tax as an itemized deduction with some restrictions. You must subtract $100 from each casualty loss before figuring out the deductible amount. Once you have subtracted this amount from each individual loss, your total losses are only deductible to the degree that they exceed 10 percent of your adjusted gross income. You must also offset this deductible loss by any amount you receive from your insurance company. If you have $50,000 in adjusted gross income, your loss, less what your insurance company paid, must exceed $5,000. If you had a $20,000 loss, with $10,000 paid by your insurance company, you can deduct $4,900 from your taxable income.
Adjustment to Cost
With most personal property, such as a car or a boat, any insurance payment you receive for damage of that property is an adjustment to the cost of that property, and is not taxable. If you depreciate the property for business use, you must figure this when you sell or dispose of the property, because it can affect your capital gains at that time. With personal use items, personal property generally depreciates so that you will not experience a gain from this adjustment, or reduction in cost.
If your property is covered by an insurance policy, but you do not file a claim for a loss, you must reduce any deduction you claim for a casualty loss by the amount your insurance company would have paid if you had filed a claim. If you have an accident with your vehicle and don't file a claim, and your insurance would have paid $2,000 toward the claim if you had filed it, you cannot deduct any portion of the $2,000.
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