The Frazins had adjusted gross income of $140,000 in 2014.During the year,their principal residence was severely damaged by a house fire.The pertinent financial information is as follows: Cost basis = $134,000
Value before casualty = $156,000
Value after casualty = $20,000
The Frazins had some insurance and in 2014 reached a settlement with the insurance company for $110,000 insurance settlement.What is their allowable casualty loss deduction for 2014?

Question

Quizplus · Accepted Answer

The casualty loss is calculated as the lesser of the decrease in fair market value ($156,000 - $20,000 = $136,000) or the adjusted basis ($134,000). The insurance reimbursement is $110,000. The loss before the insurance is $134,000, so the loss after insurance is $134,000 - $110,000 = $24,000. For tax purposes, the deductible loss is reduced by $100 and then by 10% of the AGI ($140,000 x 10% = $14,000). Therefore, the deductible loss is $24,000 - $100 - $14,000 = $9,900.

The Frazins Had Adjusted Gross Income of $140,000 in 2014