Whether you are an individual or a small business, insurance is probably a big part of your life. We insure everything from our homes, business buildings, vehicles, and even business inventories. When disaster strikes, your insurance coverage is designed to keep you afloat and help you start over. What does that mean for tax purposes? Are insurance payouts taxable? Below you will find general information to address this question for various forms of insurance coverage. Find out more about your unique situation by speaking with the experts at The Goldberg Tax Practice.
One of the biggest worries that individuals face is that they will leave their family with nothing after they pass away. Life insurance puts those worries to rest. However, another concern may creep in—will my family have to pay taxes on life insurance benefits? Thankfully, the general answer is no in most cases.
The only time that your family may have to pay taxes on life insurance is when
· You have experienced some gain on your life insurance, such as when your life insurance is paid out as an annuity that includes an interest payment
· A business owns the life insurance policy and has been writing off the premium payments
· Your estate is very large ($5,430,000 for singles in 2015), and it is subject to estate taxes
There are certain ways to avoid these taxes if you engage in careful tax planning with an experienced Alexandria, VA tax preparer.
If you receive long-term disability, you may have to report a portion of those benefits as income. However, this may only apply if you receive these benefits in part or in whole from your employer. Certain payments from insurance contracts that are meant to be reimbursement of medical expenses due to personal injury or sickness are not taxable.
Even if your employer was involved in your disability insurance, you can still avoid reporting a portion of the disability payouts if:
· You paid a portion of the disability premiums
· You paid the premiums of the insurance policy through a cafeteria plan
· You paid the entire amount of the premiums for the disability insurance plan
If you received disability payouts in lieu of compensation from your employer, however, the entire amount is considered wages and it must be reported. Figuring out who paid what portion of the premiums for this type of insurance is crucial in determining whether it will be taxable.
Usually, this benefit is not taxable. These benefits come into play when there is a natural disaster or damage to your home resulting from another source, such as fire. The benefits from this type of insurance are usually used to repair any damage that your home sustained.
This type of insurance may be taxable, however, if the property that was covered was not used for your personal residence. For example, if you have investment property that sustained damage, then the payout for that damage may be taxable. You can sometimes avoid this tax by reinvesting it into the property for repairs right away.
If you have received money after an auto accident from your insurance company or from another person’s insurance company, this money is generally not taxable. This includes occasions where your car may have been stolen as well.
The rules change, however, if you are deducting part of your vehicle expenses as a business expense. Speak with an experienced Alexandria tax preparer for more specific information.
Usually, payouts for long-term care are not taxable. However, if you deducted any portion of your long-term care premiums, then that portion may be subject to income tax. Individuals often may not realize they were deducting part of this expense, so it is important to check with your tax preparer to obtain this information.
Your long-term care insurance payouts may also be subject to taxation if your benefits are more than your medical expenses. This is often because you are required to use the benefits for medical expenses to avoid any applicable tax.
If your business has been destroyed from fire or another natural disaster, your business could end up owing some taxes on the payout amount. This is generally unlike homeowners’ insurance for individuals.
This occurs where the amount of insurance payout is higher than the depreciated tax basis of the building or other destroyed property. For older buildings with higher insurance coverage, this occurrence can be fairly common. However, if you reinvest in similar property quickly, you can avoid much of the negative tax consequences.
Any time you receive money, you should check with your Alexandria tax preparer to determine if you will have a tax bill and whether there are any methods to avoid it or decrease it. The Goldberg Tax Practice can help you maximize your benefits while minimizing your tax costs. Click on the profile link below or use the Contact button for more information.
