As a general rule, casualty insurance claim checks are not taxable. As long as the check reimburses you for damage or loss of your property, you won't need to pay taxes on the insurance proceeds. However, you may need to report a gain if the amount of the check is more than your adjusted basis in the property. You also may be able to deduct some of the casualty loss if you weren't fully reimbursed.
According to the IRS, a casualty loss occurs when a "sudden, unexpected or unusual event" causes property loss or damage. Natural events, vandalism and car accidents are all potential events that could create a casualty loss. Most of the time, your insurance company adjuster will evaluate the property damage and issue you a check that matches the fair market value reduction in your property. If this is the case, you won't have to pay taxes on the insurance proceeds.
Reporting Gains and Income Tax
If the amount of your casualty claim check is more than the decrease in value of your property, you'll need to report a gain on your tax return. The difference between the amount of the proceeds and the value of the loss is the amount of the gain. If an adjuster from your insurance company inspected your property before cutting the check, it's very unlikely that you'll report a gain. However, it is possible that your check contains insurance proceeds other than reimbursement for casualty losses. Taxpayers do have to pay taxes on awards for lost wages and emotional suffering. If you're not sure exactly what your insurance check covers, ask your insurance agent to break down the specifics.
Reporting a Loss
While it's unlikely that your insurance company will overpay you for casualty losses, it's possible that the company may not cover all the losses you incurred. The good news is that you can deduct casualty losses for which your insurance company doesn't reimburse you. For example, say that the Kelley Blue Book value of your vehicle is $15,000 before a crash and $5,000 afterward. Your insurance only reimburses you for $3,000 of damage. In this scenario, you still have $7,000 in casualty losses eligible for tax deduction.
Calculating Deductible Losses
Unfortunately, you can't deduct the entire amount of your eligible loss on your tax return. The IRS only allows taxpayers to deduct losses in excess of 10 percent of their gross income. The taxpayer must then subtract another $100 to calculate their deductible loss. For example, say your adjusted gross income is $30,000 and you suffered $7,000 of eligible casualty losses. Ten percent of your adjusted gross income is $3,000. Subtract another $100 from the total and your deductible loss is $2,900.
Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.