Oh media, stop trying to create drama where there is none… Days after the IRS confirmed that some compensatory payments to victims of the Gulf Spill are taxable, the news is filled with sensational headlines implying that this is some kind of evil money grab by the government. Shame on those reporters.
What’s happening in the Gulf right now (or perhaps, more appropriately what isn’t happening) is terrible. My heart goes out to the residents whose lives have been changed because of BP’s actions. I grew up in a coastal town in NC. Many of my friends and neighbors made their living as shrimpers and fishermen and by relying on other tourist-related activities (like me, one of my first jobs was answering the phone for the Chamber of Commerce in my little town). I understand and appreciate the lifestyle and I can only imagine the devastation that those folks are experiencing.
I also firmly believe that BP has an obligation to set things right again. They can’t bring back the men who died in the explosion but they can compensate those families. They can’t save the tourist and fishing seasons but they can make sure that those who depend on those industries to feed their families are made whole. And the list goes on.
But we should keep in mind that this tragedy – despite the scope – is still subject the our laws. And that includes the tax laws. Under current law, payments for lost income are taxable. This makes sense if you think about it since the original income would have been taxable. Changing the source or timing of the income doesn’t change the character of the income.
Additionally, compensation for emotional distress (or related symptoms) not attributable to physical injuries or sickness is generally taxable.
In contrast, compensation for physical injury or property loss (as opposed to lost income or wages) is generally not taxable. This makes sense because if the money came from another source (for example, insurance), it would not be taxable. Again, changing the source or timing of the payment doesn’t change the character of the payment.
For more information about the types and kinds of compensation and settlements, see my prior Ask the taxgirl post on the subject.
It’s important to realize that this isn’t some kind of government conspiracy. It’s not some wacky arrangement that the White House made with BP. It’s the law. It’s the same ol’ law as before. Any reporter that tries to paint it differently either has an agenda or is sorely misinformed – or perhaps some mix of the two.
For those taxpayers who might still have questions, the IRS plans to host a special Gulf Coast Assistance Day on July 17 to help small businesses and individuals sort out issues related to the Gulf spill. The IRS intends to target Alabama, Florida, Louisiana and Mississippi for the special event. I’ll post more information as it is made available.
Help is already available to taxpayers in offices nationwide and via the 1.800.829.1040 tax line. The IRS has also announced that a special telephone line will be introduced shortly to specifically aid people with tax questions related to the spill. Keep watching the blog for more information.
If you need to file a claim with BP for relief related to the spill, don’t contact the IRS. They can’t help you with the claims process (they can only address the tax portion of your claim). You need to click on over to disasterassistance.gov and follow the instructions.
Our thoughts and prayers are with the whole region. Hopefully, better things are on their way.
Worker’s Comp is the exception to the rule. Any thoughts on why that is?
Mark, workers comp benefits are related to an injury or sickness suffered on the job. In that way, they’re more like compensation for physical illness/sickness (not taxable) than wages.
This same line of logic applies to unemployment benefits. Those are directly related to wages, thus taxable (except for the temporary partial exclusion under ARRA)
Taxgirl, we rented a beach condo on Gulf Shores for July 17-24,2010. We had to pay in full on April 16, 4 days before the disaster. The contract had no clauses for cancellation other than 90 days out, which was April 16. The owner filed a claim with BP for all their properties to start getting compensated. After several unanswered calls, we decided to file one ourselves. BP cross referenced her claim with ours and looks like we are getting our money back directly from BP. Long story short, this reimbursement should not be taxable, correct? This is not lost wages, property damage etc.
This was such a horrible event for folk sin that region and BP should compensate them in many ways. The media is unfortunately jumping on “juicy news” to try to catch viewers eyes and sell ads. Headlines about the taxes are eye-catching and intriguing and so they are created.