Revenue Ruling 83-29: Are Crime Victim Payments Taxable?

Revenue Ruling 83-29 from the Internal Revenue Service (IRS) addresses payments received by individuals from state-sponsored crime victim compensation funds. This ruling establishes a clear precedent regarding whether these funds constitute taxable income for the recipient. The core determination of the ruling is that such payments are not included in a person’s gross income for federal tax purposes. This tax-free treatment applies to financial assistance provided to victims of crime or their surviving dependents through state-administered programs, and the ruling clarifies the IRS’s position on these specific types of payments, distinguishing them from other forms of income.

Scope of Tax-Free Treatment

The reasoning behind the tax-free nature of crime victim compensation payments is that the IRS concluded these awards are in the nature of welfare payments. Their purpose is not to enrich the recipient but to alleviate financial hardship and promote the general welfare of individuals who have suffered as a direct result of a crime.

The payments must originate from a state-administered crime victim compensation fund. These funds are typically financed through fees and penalties paid by convicted offenders, not general tax revenue.

The scope of what is considered a non-taxable payment is broad and covers various forms of financial loss. These payments are intended to make a victim whole for their actual, quantifiable financial losses stemming directly from the criminal act. The compensation is for pecuniary loss, and can include:

• Reimbursements for out-of-pocket medical expenses.
• Compensation for lost earnings, both past and future.
• Payments to surviving spouses or dependents for loss of support and to cover funeral expenses.
• Expenses for mental health counseling, replacement of essential personal property, or other costs that are a direct consequence of the crime.

Limitations and Related Tax Implications

One primary consideration is the tax benefit rule, which comes into play if a taxpayer previously deducted an expense and is later reimbursed for it. For instance, if an individual paid for medical care, deducted those costs on their Schedule A (Form 1040), and then received a reimbursement for those same expenses from a victim compensation fund in a later year, the reimbursement becomes taxable. The amount that must be included in income is the lesser of the reimbursement received or the amount of the tax benefit from the prior deduction.

While the compensation you receive is not taxed, recent tax law changes have limited the ability to deduct any remaining personal casualty or theft losses. For individuals, such losses are now only deductible if they are attributable to a federally declared disaster. This means if you are a crime victim and your loss did not occur in a designated disaster area, you cannot deduct the unreimbursed portion of your loss on your federal tax return.

The tax-free status does not extend to payments received from other sources. If a victim sues the perpetrator in a civil case and receives a settlement or judgment, the tax implications of that payment are governed by different rules. Portions of a civil settlement may be taxable, depending on what the payment is for.

State victim funds provide compensatory payments to reimburse for actual losses. In the rare event that any portion of an award from a different source was designated as punitive damages, that amount would be considered taxable income. Punitive damages are intended to punish the wrongdoer rather than to compensate the victim for their losses and are therefore included in the recipient’s gross income.

Reporting on Your Tax Return

Non-taxable income is simply excluded from the calculation of gross income. This means that if a state correctly administers the payment and does not issue any tax forms for it, the recipient does not need to take any action on their federal tax return regarding the payment.

A complication can arise if the state fund incorrectly issues a tax form, such as a Form 1099-G or Form 1099-MISC. Ignoring the form could trigger an IRS notice. If you receive an incorrect 1099, you should first contact the issuing state agency to request a corrected form that shows zero taxable income.

If you cannot obtain a corrected form, report the full amount shown on the 1099 form on Schedule 1 (Form 1040). On a separate line in the same section, you would then subtract the same amount, resulting in a net effect of zero. This subtraction should be labeled with a description such as “Crime Victim Compensation per Rev. Rul. 83-29” to inform the IRS of the reason for the exclusion.

If a taxpayer mistakenly included a non-taxable crime victim compensation payment as income on a tax return filed in a previous year, they can correct the error and claim a refund. This is done by filing an amended return using Form 1040-X, Amended U.S. Individual Income Tax Return. The taxpayer will need to recalculate their gross income for the prior year, excluding the payment, and explain the reason for the change on the form. Generally, a Form 1040-X must be filed within three years from the date the original return was filed or within two years from the date the tax was paid, whichever is later.