Tax 4-7, 8 Identify rules related to casualty and theft losses. Flashcards
(32 cards)
Casualty and Theft Losses
Incurring casualty and/or theft losses not connected with a trade, business, or activity entered into for profit are allowed to deduct such losses as an _____ deduction, subject to several limitations.
(4-7, 43)
itemized
Casualty and Theft Losses
The IRS defines a _____ as the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.
theft unexpected casualty unusual sudden
(4-7, 43)
casualty
Casualty and Theft Losses
A _____ event is one that is swift, not gradual or progressive.
theft unexpected casualty unusual sudden
(4-7, 43)
sudden
Casualty and Theft Losses
An _____ event is one that is ordinarily not anticipated and one that the taxpayer did not intend.
theft unexpected casualty unusual sudden
(4-7, 43)
unexpected
Casualty and Theft Losses
_____ events are those that are not day-to-day occurrences.
theft unexpected casualty unusual sudden
(4-7, 43)
Unusual
Casualty and Theft Losses
A _____ is defined as the unlawful taking and removing of money or property with the intent to deprive the owner of it.
theft unexpected casualty unusual sudden
(4-7, 43)
theft
Theft includes, but is not limited to, money or property received through larceny, robbery, embezzlement, extortion, kidnapping, threats, false representations, or blackmail.
Casualty and Theft Losses
A theft loss [is / is not] allowed for the decrease in fair market value of a security where the loss is caused by the disclosure of illegal conduct of officers or directors, or accounting fraud on the part of the company issuing the security.
(4-7, 43)
is not
Casualty and Theft Losses
Taxpayers deducting a casualty or theft loss must be able to prove such loss. For a casualty loss, taxpayers should be able to show the following:
(4-7, 44)
a. the type of casualty (e.g., flood) and when it occurred
b. that the loss was the direct result of the casualty
c. that they were the owners of the property or, if leased, they were contractually liable to the owner for the damage
Casualty and Theft Losses
Taxpayers deducting a casualty or theft loss must be able to prove such loss. For a loss related to a theft, taxpayers should be able to show the following:
(4-7, 44)
a. when they discovered the property was missing
b. that the property was actually stolen
c. that they were the owners of the property
Casualty and Theft Losses
If a loss is covered by insurance, taxpayers must _____ the deductible loss by the amount of reimbursement received from the insurance company.
increase or reduce
(4-7, 45)
reduce
No casualty or theft loss deduction is allowed for damage to or theft of insured property unless a timely claim is filed with the insurance company.
Casualty and Theft Losses
Taxpayers who receive reimbursement payments in an amount greater than their _____ basis in the property will have a casualty or theft gain. This amount generally must be reported as income for the year received. Gain can be postponed, however, if taxpayers purchase replacement property costing at least as much as the reimbursement.
(4-7, 45)
adjusted
In this case, the basis of the property purchased will be its cost less the amount of casualty or theft gain. Consequently, tax on the gain is postponed until the taxpayers sell the replacement property.
Casualty and Theft Losses
Losses and gains from casualties are reported in the year in which they _____. Losses and gains from thefts are reported in the year in which they are _____. Taxpayers use Form 4684, Casualties and Thefts, to report casualty and theft gains and losses.
discovered (used once)
occur (used once)
(4-7, 45)
occur, discovered
Casualty and Theft Losses
In each of the following situations, determine whether the taxpayer should be entitled to a casualty or theft loss deduction:
a. garage collapses due to termite damage
(4-7, 45)
no (such damage is gradual)
Casualty and Theft Losses
In each of the following situations, determine whether the taxpayer should be entitled to a casualty or theft loss deduction:
b. basement floods during an unusually heavy rain
(4-7, 45)
yes
Casualty and Theft Losses
In each of the following situations, determine whether the taxpayer should be entitled to a casualty or theft loss deduction:
c. death of a large tree due to disease
(4-7, 45)
no (it is not “sudden”)
Casualty and Theft Losses
In each of the following situations, determine whether the taxpayer should be entitled to a casualty or theft loss deduction:
d. taxpayer’s car is vandalized
(4-7, 45)
yes
Casualty and Theft Losses
In each of the following situations, determine whether the taxpayer should be entitled to a casualty or theft loss deduction:
e. taxpayer’s watch is stolen during mugging
(4-7, 45)
yes
Casualty and Theft Losses
In each of the following situations, determine whether the taxpayer should be entitled to a casualty or theft loss deduction:
f. taxpayer is involved in automobile accident due to improper lane usage
(4-7, 8, pg 45)
yes (not due to the taxpayer’s “willful negligence”)
Casualty and Theft Losses
In each of the following situations, determine whether the taxpayer should be entitled to a casualty or theft loss deduction:
g. taxpayer is involved in automobile accident and cited for driving under the influence of alcohol
(4-7, 8, pg 45)
no (due to the taxpayer’s “willful negligence”)
Casualty and Theft Losses
John Flood’s vacation home was damaged by an electrical fire. The fair market value of the home prior to the fire was $485,000. The fair market value of the home after the fire was $400,000. His insurance paid $45,000. His basis in the home was $290,000. John’s AGI is $180,000.
Calculate the allowable casualty or theft loss.
(4-7, 8, pg 78)
$180,000 AGI
$85,000 Decrease in FMV or $290,000 Adjusted Basis = $85,000 Lesser of Decrease in FMV or Adjusted Basis - $45,000 Insurance Coverage - $100 Floor - $18,000 10% of AGI = $21,900 Deductible loss on Schedule A
Casualty and Theft Losses
Daniel Monte’s personal automobile is stolen. The auto’s fair market value at the time of the theft is $26,000. When the auto is recovered, it is determined that it had been wrecked by the thieves; the fair market value is now $6,000. Daniel originally purchased the auto for $32,500. His AGI is $62,500. The insurance company paid $10,000 to Daniel.
(4-7, 8, pg 79)
$62,500 AGI
$20,000 Decrease in FMV or $32,500 Adjusted Basis = $20,000 Lesser of Decrease in FMV or Adjusted Basis - $10,000 Insurance Coverage - $100 Floor - $6,250 10% of AGI = $3,650 Deductible loss on Schedule A
Casualty and Theft Losses
Jack and Julia Jordan lost both a coin collection and a diamond bracelet late one night when a thief broke into their home. Later in the summer, a large oak tree toppled due to an insect infestation that had developed over the past seven years. The cost basis for the coin collection was $10,000, $16,000 for the diamond bracelet, and $2,000 for the oak tree. The fair market value for the coin collection was $12,000, $18,000 for the diamond bracelet, and $6,000 for the oak tree. Insurance paid only $2,000 for the coin collection and $3,000 for the diamond bracelet. The Jordans’ adjusted gross income is $49,852.
(4-7, 8, pg 78)
Step 1 Coin collection: $12,000 Decrease in FMV $10,000 Adjusted Basis = $10,000 Lesser of Decrease in FMV or Adjusted Basis - $2,000 Insurance Coverage = $8,000 casualty/theft loss
Step 2: Bracelet: $18,000 Decrease in FMV $16,000 Adjusted Basis = $16,000 Lesser of Decrease in FMV or Adjusted Basis - $3,000 Insurance Coverage = $13,000 casualty/theft loss
Step 3: $21,000 Total casualty/theft loss - $100 floor - $4,985 (10% of AGI) = $15,915 Deductible loss on Schedule A
Note: No deduction is allowed for the oak tree, as it was not “sudden or unexpected.”
*The $100 floor is per occurrence. Both items were lost in a single robbery, thus there is only one application of the $100 floor.
Casualty Loss Calculations
In order to determine the deductible non-business casualty or theft loss, the starting point of the calculation is the lesser of
(1) the decrease in the fair market value of the property as a result of the casualty or theft, or
(2) the taxpayer’s adjusted basis in the property before the casualty or theft.
The fair market value of property immediately after a theft is considered to be _____. To determine the decrease in fair market value due to a casualty, taxpayers determine the fair market value of the property both before and after the casualty. The difference is the amount of casualty loss.
(4-8, 46)
zero
Next, any insurance reimbursement (recovery is subtracted from the calculated loss. If the loss is a covered loss, a timely claim must be filed with the insurance company, or no deduction will be allowed for the casualty or theft loss.
Next, the amount of loss from each separate casualty or theft occurrence is allowed only to the extent that such loss exceeds $100. For example, if the taxpayer’s home is burglarized and three expensive items are stolen, only a single $100 reduction is necessary. If however, only one expensive item is stolen during
three separate burglaries, then there are three $100 reductions—one for each occurrence.
Finally, the total of all casualty and theft losses for the year is allowed only to the extent that it exceeds 10% of a taxpayer’s adjusted gross income (AGI).
Casualty and Theft Losses
Module Check
- Which one of the following statements is correct regarding a deductible casualty or theft loss incurred by an individual taxpayer?
a. A loss resulting from a gradual or progressive event may be deducted.
b. A loss resulting from a fire intentionally set by the taxpayer may be deducted.
c. A loss arising from blackmail may not be deducted.
d. A $100 floor per occurrence must reduce a deductible loss.
(LO 4-7)
d. A $100 floor per occurrence must reduce a deductible loss.
In calculating the deduction, a loss must be reduced by a $100 floor per occurrence and also must be reduced by 10% of the taxpayer’s AGI. The loss must also be reduced by the insurance coverage received.
a. is incorrect because “To qualify as a casualty loss, a loss must arise from an event that is sudden, not gradual or progressive.”
b. is incorrect because “To qualify as a casualty loss, a fire must not have been intentionally set by the taxpayer.”
c. is incorrect because “A theft loss may arise from blackmail, larceny, robbery, a Ponzi-type scheme, kidnapping, etc., and may be deductible.”
