Last year, Sarah (who files as single) had silverware worth $10,000 (basis $6,000) stolen from her home. Sarah's insurance company told her that her policy did not cover the theft. Sarah's other itemized deductions last year were $10,000. She had AGI of $30,000 last year. In August of the current year, Sarah's insurance company decided that Sarah's policy did cover the theft of the silverware and they paid Sarah $5,000. Determine the tax treatment of the $5,000 received by Sarah during the current year.

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Since Sarah had a $6,000 basis in the stolen silverware, the insurance payment of $5,000 doesn't fully reimburse her for her loss. Therefore, she can claim a theft loss deduction on her tax return. The deductible amount of the loss is $4,100 (($10,000 - $10,000 - $500) x 50%), which is the excess of the loss over $100 and 10% of her AGI. Since Sarah received $5,000 from the insurance company in the current year, her net theft loss is $5,900 ($10,000 - $5,000 - $6,100). Therefore, she should include $2,900 ($5,900 - $3,000) in gross income in the current year. The $3,000 reduction in the deductible loss is the amount of the personal casualty and theft loss limitation that applies to her AGI. Sarah should not amend last year's return since she didn't receive any insurance proceeds in that year.

Last Year, Sarah (Who Files as Single) Had Silverware Worth