J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

18.17 Excess Living Costs Paid by Insurance Are Not Taxable

Your insurance contract may reimburse you for excess living costs when a casualty or a threat of casualty forces you to vacate your house. The payment is tax free if these tests are met:

1. Your principal residence is damaged or destroyed by fire, storm, or other casualty or you are denied use of it by a governmental order because of the occurrence or threat of the casualty.

2. You are paid under an insurance contract for living expenses resulting from the loss of occupancy or use of the residence.

Whether you have a taxable or tax-free reimbursement is figured at the end of the period you were unable to use your residence. Thus, if the dislocation covers more than one taxable year, the taxable income, if any, will be reported in the taxable year in which the dislocation ended.

The tax-free amount includes only excess living costs paid by the insurance company. The excess is the difference between (1) the actual living expenses incurred during the time you could not use or occupy your house and (2) the normal living expenses that you would have incurred for yourself and members of your household during the period. Living expenses during the period may include the cost of renting suitable housing and extraordinary expenses for transportation, food, utilities, and miscellaneous services. The expenses must be incurred for items and services (such as laundry) needed to maintain your standard of living that you enjoyed ...