When the waters of the Mississippi began to overflow their banks and flood the s
ID: 2566009 • Letter: W
Question
When the waters of the Mississippi began to overflow their banks and flood the surrounding area, M was forced to leave her home and head for higher ground. On December 2, she returned to her home to find that it has been vandalized as well as damaged from the flood. After cleaning up, she determined that the following items as been stolen or damaged:
Item / Adjusted Basis / FMV Before / FMV After / Insurance reimbursement
Fur Coat / 6000 / 7000 / 0 / 7000
Computer / 4000 / 3000 / 0 / Uninsured
Couch / 1200 / 800 / See below / 500
Van / 7000 / 5000
The couch had been damaged and M had it reupholstered for $700. The insurance company reimbursed her for the amounts shown on December 27. Under M's insurance policy, the company did not reimburse her for loss on the car until 45 days had passed. M expected to recover $4000 but, after several delays, finally received a check for $2000 on April 25, 2018. While she was waiting for reinbursement for her van, she rented a car at a total cost of $700. Although M received value for the coat, she did not replace it. In addition to the losses shown above, her real estate broker advised that even after her house had not been damaged by the flood, the value had dropped by $20,000 since it was evident that it was located in an area prone to flooding.
a. Compute M's casualty loss deduction, assuming her AGI in 2017 was $18,000 and in 2018, $20,000.
b. Assume the loss occurred on January 2, 2018 and the location was officially designated a disaster area by the President. Explain why the loss could be deducted.
10-16 Personal Casualty. When the waters of the Mississippi began to overflow their banke flood the surrounding area, M was forced to leave her home and head for hiohes and ground. On December 2, she returned to her home to find that it had been vandalized as well as damaged from the flood. After cleaning up, she determined that the fol- lowing items had been stolen or damaged: Insurance Reimbursement Item Adjusted Basis FMV Before FMV After $7,000 Uninsured 500 $0 $7,000 3,000 Fur coat.... Computer Couch. $6,000 4,000 1,200 7,000 800 See below 5,000 The couch had been damaged and M had it reupholstered for $700. The insurance company reimbursed her for the amounts shown on December 27. Under M's insur- ance policy, the company did not reimburse her for loss on the car until 45 days had passed. M expected to recover $4,000 but, after several delays, finally received a check for $2,000 on April 25, 2018. While she was waiting for reimbursement for her van, she rented a car at a total cost of $700. Although M received value for the coat, she did not replace it. In addition to the losses shown above, her real estate broker advised that even though her house had not been damaged by the flood, the value had dropped by $20,000 since it was evident that it was located in an area prone to flooding a. Compute M's casualty loss deduction, assuming her AGI in 2017 was $18,000 and in 2018, $20,000 Assume the loss occurred on January 2, 2018 and the location was officially des- ignated a disaster area by the President. Explain when the loss could be deducted. b.Explanation / Answer
a) find below the working for compute casualty loss
Notes:
1) As per IRS insurance has to be deducted as casualty loss in the year which is occurred.
2) Any un insured property cannot be claimed as loss from casualty, hence computer is excluded.
3) Losses on normal wear and tear of property cannot be considered as casualty loss, hence FMV before is incident is considered for determining the loss on casualty.
4) As per IRS, money reimbursed from insurance company and expected to receive should be deducted from the casualty loss for determining total loss from casualty, hence total loss on van is = $1,000 (FMV of van -expected to recover $4,000).
5) FMV of couch before incident was $800 which had been damaged and M had spent $700 to reupholstered it (which is additional cost) which M had spent for brining the couch back to normal position (before incident) and insurance reimbursement was $500, hence loss on casualty for couch is $200.
6) Commuting expenses of $700 can not included in deductable casualty loss.
a) Total Casualty loss is $1,200
b) 10% of AGI is $ 1,800
Whichever is least a or b is deductible as casualty loss her AGI in 2017, Actual deduction is $1,200 in 2017.
b) As per IRS, the general rule is that casualty loss must be deducted in the year it occurred. However, if the loss is officially designated as a disaster area by the president, then M may have a choice to when to deduct loss in 2017or in 2018.
In this scenario loss occurred on January 02, 2018 hence casualty loss should be deducted in M AGI in 2018 only.
FMV Before FMV After Insurance reimbursement Casualty Loss Fur Coat $7000 0 $7000 0 Computer $3000 0 Un insured 0 Couch $800 500 $200 Van $5000 0 0 $1,000 Total Loss $1,200Related Questions
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