Maybe yes, maybe no!
First, let’s check out the meaning of insurance settlement:
Insurance settlement happens when a defendant or an insurer pays to the injured person. Whenever you’re negotiating a personal injury claim or an auto insurance claim after an accident, an adjuster deals with the matter.
Is insurance settlement taxable?
Generally, settlements for auto or home insurance and life insurance benefits are not considered as a taxable income. But, as you know exceptions are always there. Some cases are there, where the federal government or your state government may demand a share of your insurance money.
Find out when you’re liable to pay taxes on your insurance settlement:
1. Life insurance settlement
As per Conrad Davis, a certified public accountant, and partner with Ueltzen & Co. in Sacramento, California, since premiums aren’t deductible, life insurance is tax-free. But, as I’ve already mentioned exceptions are always there. For instance, insurance money is taxable if you sell the life insurance policy before your death to collect money and if the death benefit surpasses the amount the investors paid for the policy. This type of activity is known as a life settlement.
Your life insurance benefits will also be taxed under the state and federal government, depending on the state where you live and the size of your estate. Taxes will be counted while calculating the value of your property only if you own your own estate. Your estate becomes taxable if your life insurance policy pushes your property's value over a limit, which is $5.49 million in 2017.
If you have your own life insurance policy and if your estate is liable to an estate tax, life insurance proceeds are subject to taxes. However, it’s not taxable if your husband/wife is the beneficiary of your property and taxable if the estate is passed on to your children. You can also transfer the ownership of your estate to another person or a trust if you want to get rid of the taxes.
2. Home and auto insurance settlementsYou have to pay taxes on your home or car insurance settlement if the amount surpasses the original cost of your property. It’s because the excess money is considered as an income.
You won’t be hit with a tax bill if the insurance money covers lost property or provides compensation for lost wages or injuries. For instance, according to Davis, “if you bought a car for $20,000 and it is smashed up and the insurance company gives you $15,000, there should be no tax in that situation.”
As there are lots of ifs and buts, regarding paying insurance settlement tax, you must take professional help before preparing taxes next year.