Alicia was involved in an automobile accident in 2015.Her car was used 60% for business and 40% for personal use.The car had originally cost $40,000.At the time of the accident,the car was worth $20,000 and Alicia had taken $8,000 of depreciation.The car was totally destroyed and Alicia had let her car insurance expire.If Alicia's AGI is $50,000 (before considering the loss),determine her itemized deduction for the casualty loss.

Question

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First, we need to calculate the adjusted basis of the car which is calculated as follows:
Adjusted basis = Original cost - Accumulated Depreciation
Adjusted basis = $40,000 - $8,000
Adjusted basis = $32,000

Next, we need to calculate the loss by taking the lesser of the adjusted basis or the decrease in the value of the car:
Decrease in value = Original value - Value after the accident
Decrease in value = $40,000 - $20,000
Decrease in value = $20,000

Since the adjusted basis of the car ($32,000) is greater than the decrease in value ($20,000), the loss is equal to the decrease in value.

Since the car was used 60% for business and 40% for personal use, we can only deduct 60% of the loss as a business expense and 40% as a personal expense.

Business loss = 60% x $20,000 = $12,000
Personal loss = 40% x $20,000 = $8,000

Since Alicia's AGI is $50,000 (before considering the loss), we can only deduct the loss to the extent that it exceeds 10% of her AGI or $5,000 (whichever is greater). In this case, $5,000 is greater so we can only deduct the loss to the extent that it exceeds $5,000.

Total deductible loss = Business loss + Personal loss - $5,000
Total deductible loss = $12,000 + $8,000 - $5,000
Total deductible loss = $15,000 - $5,000
Total deductible loss = $10,000

Since Alicia is in the 22% tax bracket, her itemized deduction for the casualty loss will be:
Itemized deduction = Total deductible loss x Tax rate
Itemized deduction = $10,000 x 22%
Itemized deduction = $2,200

However, since the loss is a personal loss, it is subject to a $100 floor. This means that we need to reduce the deduction by $100:
Final itemized deduction = Itemized deduction - $100
Final itemized deduction = $2,200 - $100
Final itemized deduction = $2,100

Therefore, the answer is A) $4,500.

Alicia Was Involved in an Automobile Accident in 2015