Academic journal article Journal of Accountancy

Flood Relief

Academic journal article Journal of Accountancy

Flood Relief

Article excerpt

In July 1993 the overflowing Mississippi River destroyed the principal residence of Joe Homeowner. Until the residence is rebuilt and ready for occupancy in August 1995, Joe and his family will have to live somewhere else.

Fortunately, Joe's insurance contract provides for a temporary increase in living expenses in the event of the loss of his principal residence due to fire, storm or a similar casualty. Are the insurance proceeds taxable?

Section 61 of the Internal Revenue Code says gross income includes all income from any source except as otherwise provided by law. However, IRC section 123(a) says if an individual's principal residence is damaged or destroyed by fire, storm or a similar casualty, amounts received by the individual under an insurance contract are not included in gross income if paid to compensate or reimburse for living expenses incurred by the taxpayer and members of his or her household resulting from the loss of the residence's use or occupancy.

Section 123(b) limits this exclusion to the excess of the actual living expenses incurred over normal living expenses that would have been incurred during the period. Generally, such additional expenses include the extra costs of renting suitable housing and any extraordinary expenses for transportation, food, utilities and other services. Thus, the taxpayer and his or her family can maintain their customary standard of living during the loss period.

But what if the insurance proceeds exceed the individual's increased living expenses during the loss period? According to revenue ruling 93-43, if that is the case, the excess portion of the insurance money is included in the individual's gross income for the taxable year in which the loss period ends or, if later, for the taxable year in which the excess portion of the insurance proceeds is received. …

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