Home insurance reimbursements can reduce a lot of stress after a fire, storm or other disaster damages your home and leaves you scrambling to pay for the repairs. Yet that stress relief often fades when tax season rolls around and homeowners become unsure about how to report the money. Find out the facts about paying taxes on claim reimbursements from the home insurance company and how to file these payments correctly on a tax return.
No Taxes Owed
Under the U.S. Tax Code, reimbursement payments from a home insurance policy aren't considered taxable income. Since the home insurance company is sending you the money in exchange for a recorded and measurable expense to your property, you're not actually gaining any income by receiving the payment. The only exception is for reimbursements paid out for damage to investment properties since these units generate income.
Reducing Your Total Reported Income
If you've deposited a check from the home insurance company into your bank account in the current tax year, you can simply not report that amount as part of your income.
Check with state laws on home insurance payments before assuming that you can hold the money indefinitely before beginning repairs. Many states set distinct timelines on how quickly repairs must begin after receiving a reimbursement payment. If you hold the money too long while choosing a contractor or finding the right materials, you could end up paying taxes on it as income. You might not be able to simply take the money and not make repairs to the home.
Losses Not Covered by Insurance
Sometimes insurance policies specifically exclude a specific type of damage. In these cases, the homeowner can often file for a deduction for any losses and expenses not covered by the home insurance reimbursement.
Reducing your total amount of income tax by declaring the damage to your home can help you free up the money to cover needed repairs. Talk to your accountant about reporting a damage loss on your next tax return since there's a complex formula used to calculate the exact amount of the deduction.
Everyone's tax situation is different, so check with a local tax professional before making any decisions about how to handle your home insurance reimbursements. Make sure to keep records related to the claims and evidence of the damage to your home for seven years in case the IRS or a state tax agency needs to verify your claims.