Oil-spill victims compensated for lost wages will have to pay taxes

WASHINGTON -- The Internal Revenue Service says oil-spill victims who receive BP payments for lost wages will have to pay up come tax time.

Under current law, BP payments for lost wages are taxable -- just as the wages would have been, the IRS said Friday. Payments for physical injuries or property loss, however, are generally tax-free. Payments for emotional distress? Taxable, although medical expenses related to the emotional distress are deductible.

BP officials have agreed to create a $20 billion fund for spill victims and a $100 million fund for displaced oil-rig workers.

The IRS has posted the tax information on its Web site.

Rep. Charlie Melancon (D-La.) introduced a bill this week to exempt all BP payments to spill victims from taxes.

"Compensation from BP will help, but during this uncertain time Louisianians will need to stretch every dollar and should not have to worry about setting aside a portion of the payments for taxes," Melancon said.

Associated Press