question.jpgIn Federal Income Tax

How does insurance and reimbursement effect my deduction?

If you received any insurance payment or other reimbursement for the property that was damaged or lost, you must subtract the amount of that payment from the value of the loss. Even if you have not actually received a reimbursement payment, you must subtract any expected payment (even if that payment will not come in the same tax year). The most common type of reimbursement is payment from an insurance company for insurance protecting the damaged or lost property. But reimbursements can also include payments from emergency disaster funds maintained by your employer or cash gifts which are limited to repair use (but not cash gifts, such as a check from your family or friends, which has no limitation on how it can be used).

If you claim an expected reimbursement and that reimbursement later ends up being for a different amount, you should include that difference as a new loss (if it was for less than you originally claimed and expected) or as additional income (if the amount of the reimbursement you originally claimed ended up reducing your tax burden).

Two other points worth noting: (i) if could have filed an insurance claim but failed to file such a claim in the requisite time, you cannot deduct the loss at all; and (ii) if the reimbursement you got was more than the adjusted basis of the property, this is considered a gain, and you may have to pay tax on this gain (you should see IRS Publication 547).