Mr. and Mrs. Blake suffered two casualty losses this year. Mr. Blake's wallet containing $1,300 cash was stolen, and their uninsured sailboat (basis $67,000; FMV $50,000) was destroyed by a tsunami (federally declared disaster). Compute the Blakes' itemized deduction for casualty losses if their AGI was $112,200.

Question

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To compute the itemized deduction for casualty losses, the Blakes first need to add up their total casualty losses. In this case, their losses are:

- Stolen cash: $1,300
- Destroyed sailboat: [(basis $67,000) - (FMV $50,000)] = $17,000

Total loss = $1,300 + $17,000 = $18,300

Next, the Blakes need to reduce their loss by any insurance reimbursement they received. In this case, they did not have insurance for the sailboat, so their total loss is unchanged.

Finally, the Blakes can only deduct casualty losses to the extent that they exceed 10% of their adjusted gross income (AGI). In this case, 10% of the Blakes' AGI is:

10% x $112,200 = $11,220

Since their total loss of $18,300 exceeds the 10% threshold of $11,220, they can deduct the excess amount:

$18,300 - $11,220 = $7,080

Therefore, the Blakes can deduct $7,080 as an itemized deduction for casualty losses.

Mr and Mrs