Insurance payout

[cptacek]

My parents had a high line pole fall over due to the pole being rotted, and it killed my sister's horse. This is a horse that she received in compensation for training two other horses for a guy, and she had recorded all the hours she had worked on it.

A previous horse she has trained sold for $5200, and this horse was better than that one. She had put more time and effort into this horse, and it was simply a better horse.

She documented hours she had put into this horse, showed comparable horses for sale and their prices, pictures of the rotted pole, weather reports that there was no storm in the area, sheriff report, etc., and submitted it to the electric company's insurance company.

The insurance company ended up paying her $10,000 (she actually asked for $8500, but they paid $10,000. I wonder what she would have gotten if she had submitted all of that without saying what she wanted).

So, my question is, will she have to pay taxes on this? From a cursory look around the internet, it seems that because the money is replacing something of value, she shouldn't have to pay any taxes on the settlement.

If that is true, then I wonder why we have to pay taxes on crop insurance proceeds? It is replacing something we had of value...

[buildmybudget]

Hmmm...what a sad story. I'm not certain about the taxes but it's quite nice that the insurance company covered more than she was hoping to get. Hopefully that will cover any taxes owed, although I can't see how you could be taxed for someone replacing something that was destroyed. eg: If a hurricane destroyed my house, would I have to pay taxes when they rebuild it?

[graceful]

Logically, it would seem that it wouldn't be taxable but a call to the IRS help center might confirm this.

As for the crop insurance proceeds, logically it is replacing something of value that you would sell for a profit and therefore, the insurance is replacing the sale that you would have made and thus regular income taxes would be due on the sale. i would imagine you should be able to deduct the costs involved in the crops and only owe taxes on the net profit. But, again, I know nothing for sure, it's get my guess. Consult a tax professional for the real answer.

Sorry for the loss. Glad your sister didn't have to argue with the insurance company to get the payout.

[wincrasher]

Insurance proceeds for personal loss are not taxable.

Insurance claims for business losses are. If she was using this horse to earn income and she was getting a payment for that lost income, then she would pay taxes on it for that portion.

I'm kinda surprised that she went thru all that effort to document what she "earned" to pay for the horse. Irrelevant really. It's worth what it's worth and is probably highly negotiable based on the value of similar animals bought and sold.

[cptacek]

No, she didn't get anything for the income. Should be just for the loss.

She documented it that way because there is a huge difference in value of horses. Some you can't give away, some are worth, apparently, $10,000 She documented everything to show how she came up with that number.

[creditcardfree]

I would agree that it is likely not taxable. She could call the insurance company that made the payment to clarify. They should be able to tell her if they are sending any type of IRS form.

[wincrasher]

That brings up a good point - you may have to declare it, but no taxes should be due.

They may issue a 1099 for it, but that doesn't mean it's taxable.

You need to pull up publication 21 on the irs site and see what they say.

[cptacek]

I tried to look up publication 21 on the irs.gov site, but couldn't find it. Do you have a name of the publication?