We had roof damage due to hail and filed an insurance claim. We received $14,000 from our insurance company. The check was made out to us and our mortgage company. The mortgage company made us endorse the check and send it to them. They then sent us a check for $10,000. When the repair work was completed, they sent us the remainder. We have received a 1099-Misc from the mortage company. This shouldn't be considered income, per IRS Publication 525. I contacted the mortgage company to see if they could rescind the 1099 and they said they were correct in sending it to us because they actually paid us the money. What can I do to keep from paying tax on this?

You won't have to pay taxes on it. Yes you will list the 14K on your tax return as income but you will also list the cost of the roof repair as a write off against that income. In the end it will not affect the amount of taxes you owe at all. Take a breath. I's all good.

I am curious what was your total loss that was sustained on the loss? Actually, the fact that you received the 1099-Misc does not mean that this your taxable gain! Generally speaking, if you receive an insurance payment or other reimbursement that is more than your adjusted basis in the destroyed, damaged, or stolen property, you have a gain from the casualty or theft.

Your taxable gain if any is calculated as follows.

1. The amount you receive (that is the insurance reimbursement), minus
2. Loss sustained on the damaged roof.

Now if you show a loss, you are required to reduce the loss by any reimbursement and by $500 for tax year 2009. Then you must reduce the total of your losses by 10% of your 2009 adjusted gross income.

Thus, in many instances casualty losses are never fully deductible on your tax return.

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Ask TaxGuru Please refer to the legal disclaimer.

I also received a 1099-MISC w/$10,000 listed as income on my $16K claim. I am still in the process of conducting repairs to my basement, and the mortgage co. had an inspector visit in Dec. of 2009. When I contacted my mortgage co., they said they send that out to all payees. However, I had to take my return to a CPA this year because of this, and he said he'd never seen this before. He suggested that we file w/out the 1099-MISC and expect a call from the IRS, to which we could demonstrate that it was not in fact income. Makes me nervous, but I don't think paying taxes on it is any better. Any thoughts?