Tick. Tick. Tick. April 15 is coming. About 1% of the population is audited every year, but in an effort to bolster revenues, the IRS is reportedly ramping up their scrutiny. One of the red flags is unreported income. Is the inheritance you got from your Aunt Edna’s life insurance policy taxable? Is there a tax on your homeowners insurance claim or car insurance claim? What, if any of these insurance benefits and insurance settlements do you have to declare as taxable income? Here are some basic guidelines, but please be sure to verify the information for your specific situation with the IRS or your professional tax preparer.
Is there a tax on life insurance benefits?
No. The proceeds from a cash-value whole life or term life policy paid to the beneficiaries is not taxable income. However, the value of the insurance and any earnings from the investment component of a life insurance policy are subject to estate taxes.
If you file a claim on your homeowner’s policy is any cash you receive taxable income?
No. You lost something of value and presumably you will replace it or repair it with the cash from your homeowner’s coverage.
If you file a claim on your car insurance is the cash taxable income?
No again. Any money you get to fix your damaged car or replace a stolen one does not count as income.
Are payments from a disability insurance claim taxable?
It depends. If your disability insurance is provided by your employer as a tax-free fringe benefit or if you pay for the policy with pre-tax dollars, any benefits you receive if you’re disabled probably are taxable income, but check with your employer or tax preparer to be sure. If you paid for the policy with after-tax dollars, the benefits are not taxable.
Are health insurance benefits taxable?
No. Regardless of who pays for your health insurance, whether or not it’s paid with pre-tax or after-tax dollars, the benefits are not taxable.
Are long-term care insurance benefits taxable?
No. As with health insurance, these benefits generally are not taxable.For more information about taxable income on insurance settlements, please see Are Insurance Settlements Taxable Income?
For information about insurance premium tax deductions, please see, How to Maximize Your insurance Tax Deduction for 2010, Key Man Life Insurance and Tax Deductions, and Small Business Insurance Tax Deductions for 2010.