Sewage Settlement

Today TaxMama hears from Angela in Michigan who tells us. “We were the victims of a sewage backup in 2000. There was a class action lawsuit and we were finally awarded, almost $10,000 for property damage. I cannot find a clear-cut answer whether or not the settlement is exempt from income tax. “

Dear Angela,

Eeewwww, that must have been an awfully stinky experience!

I’ll bet you spent quite a bit of money cleaning that up back then, didn’t you?

And I’ll bet that you have copies of all the expenses to clean up the damage and to replace noisome carpets, etc. After all, you submitted the receipts for the lawsuit, right?

OK, here’s a piece of great news. That award is not taxable income. You should not have to report it at all, unless you get a 1099 for it. Here’s what you do need to do.

Put copies of all the repair receipts into your permanent house file. Include your costs for temporary lodging while you were out of the home. Add them up. Deduct the $10,000 settlement. Whatever the difference is, negative or positive, add it to (or subtract it from) the cost of your home.

If you previously took a casualty loss deduction, deduct that from the cost of your home, too. This will give you the new tax basis of your home.

You may be able to find an explanation of the tax basis adjustments in IRS Publication 584 the Casualty and Theft Loss Workbook. http://www.irs.gov/publications/p584/index.html

Don’t use the casualty loss now, if you used it back in 2000. But if you didn’t, if you were waiting for the settlement in order to know what your loss really was, you just might be able to use the casualty loss in the year you got the reimbursement, if your costs were higher than $10,000. Otherwise…stick with my earlier notes, above. I hope that helps?

And remember, you can find answers to all kinds of questions about settlements, and other tax issues, free. Where? Where else? At TaxMama.com

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