Unemployment Insurance

• Unemployment insurance benefits are considered taxable income because they replace what would otherwise be regular taxable income. However, it is not typically taxed like your paycheck. Normal unemployment insurance benefit checks have no taxes withheld. This will likely result in a tax liability you must pay the following year. If you cannot budget for this expense on your own, you can elect to have taxes withheld as you receive the benefit.
  
  

Property Insurance

• Standard property insurance benefits, like auto and home settlements, are not usually taxable. Most of the time, you receive a cash settlement that is less than your cost basis, which is the money you invested in the property. Because you do not see a financial gain, you owe no taxes. Whether you keep the cash or use it to repair or replace the damaged property, this shouldn't affect your taxable income. The exception is when you receive more than your cost basis. For example, if you purchased a home for $200,000 and received a $220,000 settlement, you owe taxes on the $20,000 gain.
  
  

Life Insurance

• Life insurance is not typically taxable as income. Regardless of the size of the life insurance settlement, the beneficiary does not owe income taxes on the benefit unless he receives an amount greater than the amount stated in the policy. For example, if the life insurance company paid any interest on the death benefit, the beneficiary might owe taxes on the interest. Generally, however, life insurance proceeds are tax-free.
  
  

Estate Taxes

• Life insurance proceeds may be subject to estate taxation. If a life policy has no stated beneficiary, the proceeds are generally added to the deceased person's estate. If the total estate amount exceeds the government's threshold for taxation, the insurance benefit is taxed at the current estate tax rate. For this reason, it is not wise to allow life insurance proceeds to become part of your estate. Instead, you can create an irrevocable life insurance trust with the assistance of a CPA or lawyer. The trust then owns the life policy and the proceeds are both estate- and income tax-free. The life insurance benefit can actually pay your estate tax liability for you, if the trust is created and managed properly.