On June 28th, the Commissioner of the IRS responded to a request by Congressman Mike Thompson and Congressman Doug LaMalfa requesting guidance on the taxability of the settlement funds received from the Fire Victims Trust (FVT). The IRS letter echoed articles you have seen here on calfiretaxinfo.org where we’ve been providing this guidance for over a year now.
A quick summary of the IRS letter is:
- Your settlement is considered income unless you can find a specific IRC Code section to exclude it. (IRC 61) – so anyone who tells you it is not taxable because they did not receive a 1099 is wrong.
- Payments for physical injury are excludable from gross income. (IRC 104)
- Payments for emotional distress are not excludable unless the emotional distress is caused by the personal physical injury or are an actual reimbursement of medical expenses that were not previously deducted. (IRC 104)
- Payments to reimburse for necessary personal, family, living, or funeral expenses are excludable from gross income. (IRC 139)
- Payments to rebuild (not replace) your home are excludable. (IRC 139)
- Payments to replace your contents are excludable. (IRC 139)
- Payments that are not otherwise excludable may be able to be deferred as an involuntary conversion. (IRC 1033)
Of course, this is an over-simplified summary of how to treat the payments. Calculating the taxability of your settlement can be extremely complex and thus we recommend you hire a professional tax preparer to help you if you lost your home in the fire and/or are receiving payments from the Fire Victims Trust.