Thursday, June 24, 2010

Are BP payments taxable income?

Many people on the Gulf Coast affected by the oil spill are filing claims through the BP oil company and they want to know, “Will the BP payments be taxable income?” This great question came up on the Don’tMessWithTaxes blog, and the answer to the question is: Yes, the payments will probably be taxable, but you never know, maybe not. Basically, the BP payments are considered payments made to individuals in the form of compensation for lost wages that would have otherwise been taxable income. Therefore, taxable. But sometimes people will get special tax treatment if they’ve been affected by disasters. Remember my blog about tax relief to flood victims?

Kenneth Feinberg, head of the Independent Claims Facility, said last week that it hasn't been determined if the payouts will be considered taxable income. Remember, this isn’t a gift from BP, it’s been given to cover money lost for jobs that couldn’t be done. The Treasury would lose a lot of revenue from these checks.

The recommendation is always set aside money for the IRS until you are certain it will not be taxable, just to be safe.

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