The Costa unit of Carnival Cruises has offered uninjured passengers the equivalent of $14,460 each to compensate for lost baggage and the trauma from the incident. Even though the accident happened in Italy, every U.S. citizen and permanent resident has to report worldwide income. Any gains from the settlement will likely be considered income because the definition of “income” is very broad. If a passenger’s belongings were worth more than the $14,000 compensation, then the passenger should be able to cover his/her basis and then claim a casualty loss for whatever the diffrence is between the value of his/her belongings and the settlement. There are potential problems with proving the value of items, but it is possible to claim a loss. Damages for physical injuries are tax-free, but emotional injuries are not clearly tax-free. Since this settlement only addresses lost baggage and trauma from the accident, it will likely be taxable.
See Robert W. Wood, IRS To Collect on Italian Cruise Ship Settlements, Forbes, Jan. 28, 2012.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.
