Shivank and Claudia are MFL and had the following items for 2017: Salary $183,00

Question

Shivank and Claudia are MFL and had the following items for 2017:

Salary $183,000

Loss on sale  §1244 small business stock acquired 3 years ago* (110,000)

Stock acquired 2 years ago became worthless during the year* (10,000)

Long-term capital gain: 25,000

Nonbusiness bad debt* (9,000)

Shivank had a car accident during the year in which his car was completely destroyed. At the time of the accident, the car had a fair market value of $30,000 and an adjusted basis of $40,000. He used the car 100% of the time for personal use. He received an insurance recovery of $21,000.

1. Provide a detailed calculation of the couple's AGI. Your answer should also include any applicable rules, exceptions to rules, limitations, tax treatment of all items that have an * next to them.

2. a. What is the rule for calculating the amount of the casualty loss?

b. Apply the rules to the facts and show a detailed calculation of the loss.

c. Which schedules/lines do the loss appear on?

Explanation / Answer

1) Calculation Shivank and Claudia's adjusted gross income for 2017

Note 1: Non business bad debt - As per IRS non business debt are not allowed as deduction in calculating AGI, however it has provision that if the person claiming such debt shows the proof of efforts they made to collect the debt then such debt are allowed as deduction in AGI, in the year it is considered as bad debts.

Note 2: Assuming car accident is not caused due to Shivank's negligence or mistake, hence it is treated as unexpected or sudden damage to the property and not classified under progressive deterioration.

2) Any casualty loss caused due to damage or loss of property from sudden, unexpected or un usual events like floods, earth quake, hurricane etc. This excludes the wear and tear and progressive deterioration.

The casualty loss can be deducted net of any salvage value and insurance reimbursement or recovery or expected to receive, such casualty losses are generally allowed to deduct in year if such event occurred.

Please Note: 1) In case one question with multiple subparts, only first 4 subparts needs be                                       answered as a mandatory requirement and

                       2) In case of multiple questions only first question (full) with minimum 4 sub parts (in                       case of more sub parts) needs to be answered as a mandatory requirement.

Shivank and Claudia are MFL - Married filling jointly Salary $183,000 Notes Less long term capital loss (ordinary loss under section 1244) * Section 1244 allowes loss on sale of small business as a normal loss, $50,000 for individual and $100,000 for married filling jointly ($110,000-$100,000) -$10,000 Long term capital Gain $25,000 Less: Stock acquired 2 years ago became worthless during the year (long term capital loss) * -$10,000 Net long term capital gain $15,000 Mr and Mrs Shivank had enouogh capital gain to deduct the capital loss (FMV $30,000-$21,000 Insurance claim) * -$9,000 As per IRS, money reimbursed from insurance company or expected to receive needs to be deducted from the casualty loss for determining total loss from casualty, hence total loss on car is = $9,000 (FMV of car $30,000 -insurance recovery $21,000) Net capital Loss -$4,000 Adjusted gross income $179,000

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