General Principle

Generally, the Internal Revenue Service considers every form of money you receive as taxable income unless it has specific rules or exclusions that apply. However, just because it is taxable income doesn't mean it automatically gets taxed. The expenses related to the income you receive could minimize or eliminate the taxable portion of your settlement. The IRS is only interested in taxing financial gains, so if you don't realize a gain, you probably won't owe any taxes.

Property Insurance

Property insurance is one of the most common types of settlements. You typically only owe taxes on your settlement if it exceeds the amount of your initial investment in the property. For example, if you buy a home for $200,000 but receive $250,000 from your insurer, you may owe taxes on the excess of $50,000. Businesses and, in some cases, individuals are generally permitted to avoid taxation on the excess if it is reinvested into the damaged property or similar property to replace it.

Income Insurance

Individuals receive disability and other forms of insurance to replace their income in some circumstances. Businesses that have "lost income" protection can receive payments from their insurers that replace income that is lost as a result of a covered claim. Any insurance settlement that replaces income that would otherwise be taxable is, itself, taxable. This money is subject to the same income and expense deduction rules as your ordinary income would be.

Life Insurance

Under normal circumstances, life insurance proceeds are not taxed. One instance when you may owe taxes on a life insurance settlement is if you receive more from the insurer than the benefit amount stated on the policy, such as when a settlement delay forces the insurer to pay interest on the benefit amount. You would then owe taxes on the amount that exceeds the stated benefit. Other tax rules may apply, so consult an accountant if you have questions.