Tax 4-7, 8 Identify rules related to casualty and theft losses.

Question 1

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)

Answer 1

itemized

Question 2

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)

Answer 2

casualty

Question 3

Casualty and Theft Losses

A _____ event is one that is swift, not gradual or progressive.

theft
unexpected 
casualty
unusual 
sudden

(4-7, 43)

Answer 3

sudden

Question 4

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)

Answer 4

unexpected

Question 5

Casualty and Theft Losses

_____ events are those that are not day-to-day occurrences.

theft
unexpected 
casualty
unusual 
sudden

(4-7, 43)

Answer 5

Unusual

Question 6

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)

Answer 6

theft

Theft includes, but is not limited to, money or property received through larceny, robbery, embezzlement, extortion, kidnapping, threats, false representations, or blackmail.

Question 7

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)

Answer 7

is not

Question 8

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)

Answer 8

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

Question 9

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)

Answer 9

a. when they discovered the property was missing
b. that the property was actually stolen
c. that they were the owners of the property

Question 10

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)

Answer 10

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.

Question 11

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)

Answer 11

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.

Question 12

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)

Answer 12

occur, discovered

Question 13

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)

Answer 13

no (such damage is gradual)

Question 14

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)

Answer 14

yes

Question 15

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)

Answer 15

no (it is not “sudden”)

Question 16

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)

Answer 16

yes

Question 17

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)

Answer 17

yes

Question 18

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)

Answer 18

yes (not due to the taxpayer’s “willful negligence”)

Question 19

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)

Answer 19

no (due to the taxpayer’s “willful negligence”)

Question 20

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)

Answer 20

$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

Question 21

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)

Answer 21

$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

Question 22

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)

Answer 22

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.

Question 23

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)

Answer 23

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).

Question 24

Casualty and Theft Losses

Module Check

11. 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)

Answer 24

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.”

Question 25

Casualty and Theft Losses

Module Check

12. Phillip Gunther’s classic automobile was completely destroyed in a fire at the storage unit where he had it garaged. The insurance company paid $10,000 on the vehicle. The auto’s fair market value was $28,000, and his basis was $22,000. Phillip’s AGI is $55,000. What is the amount of Phillip’s deductible casualty loss?

$6,400

$6,500

$12,400

$12,500

(LO 4-8)

Answer 25

$6,400

$55,000 AGI

$28,000	Decrease in FMV
or
$22,000	Adjusted Basis
= $22,000 Lesser of Decrease in FMV or Adjusted Basis
- $10,000 Insurance Coverage 
- $100 Floor 
- $5,500	10% of AGI
= $6,400	Deductible loss on Schedule A

Question 26

Casualty and Theft Losses

Module Check

22. In which of the following situations may the taxpayer deduct a casualty or theft loss?
    a. the taxpayer’s roof collapses due to termite damage
    b. the taxpayer’s home is damaged due to an unusually heavy snow storm
    c. the taxpayer’s large elm tree dies due to Dutch Elm disease

(LO 4-7)

Answer 26

b. the taxpayer’s home is damaged due to an unusually heavy snow storm

Damage due to storms does qualify for a casualty loss deduction.

Question 27

Casualty and Theft Losses

Module Check

23. A casualty or theft loss deduction is treated as a(n)
    a. tier II miscellaneous itemized deduction.
    b. adjustment to income.
    c. itemized deduction.

(LO 4-7)

Answer 27

c. itemized deduction.

A casualty or theft loss deduction is treated as an itemized deduction, but it is not a tier II miscellaneous itemized deduction.

A casualty or theft loss deduction is treated as an itemized deduction, but not a tier II deduction.

A casualty or theft loss deduction is treated as an itemized deduction, not as an adjustment to income.

Question 28

Casualty and Theft Losses

Module Check

24. Helen’s personal residence was damaged by a hail storm. The fair market value of the home prior to the storm was $365,000. The fair market value of the home after the storm was $300,000. Her insurance paid $25,000. The basis in the home was $290,000. Helen’s AGI is $200,000.

What is the amount, if any, of Helen’s deductible casualty loss?

$0

$19,900

$20,000

$245,000

(LO 4-8)

Answer 28

$19,900

$200,000 AGI

$65,000	Decrease in FMV
or
$290,000 Adjusted Basis
= $65,000 Lesser of Decrease in FMV or Adjusted Basis
- $25,000 Insurance Coverage 
- $100 Floor 
- $20,000 10% of AGI
= $19,900 Deductible loss on Schedule A

Question 29

Casualty and Theft Losses

28. John Grange’s vacation home was completely destroyed by an earthquake. The fair market value of the home was $400,000. John did not have insurance coverage on the property. His basis in the home was $100,000. John’s AGI is $500,000. What is the amount, if any, of John’s casualty loss deduction?
    a. $0
    b. $49,900
    c. $50,000

(LO 4-8)

Answer 29

b. $49,900

$500,000 AGI

$400,000 Decrease in FMV
or
$100,000 Adjusted Basis
= $100,000 Lesser of Decrease in FMV or Adjusted Basis
- $0	Insurance Coverage 
- $100 Floor 
- $50,000 10% of AGI
= $49,900 Deductible loss on Schedule A

Question 30

Casualty and Theft Losses

12. Phillip Kramer’s classic automobile was stolen and not recovered. Unfortunately, his insurance paid only $2,000, while the fair market value was $12,000. His basis in the automobile was $7,000. Phillip’s AGI is $35,000.

What is the amount, if any, of Phillip’s deductible casualty loss?

(LO 4-8)

Answer 30

$1,400

$35,000 AGI

$12,000 Decrease in FMV
or
$7,000 Adjusted Basis
= $7,000	Lesser of Decrease in FMV or Adjusted Basis
- $2,000	Insurance Coverage 
- $100 Floor 
- $3,500	10% of AGI
= $1,400	Deductible loss on Schedule A

Question 31

Practice Test 2

Casualty and Theft Losses

37. Phillip Hunter’s personal automobile was completely destroyed in an accident. Insurance paid $6,000 on the loss. The auto’s fair market value was $16,000, and his basis in it was $23,500. Phillip’s AGI is $72,500.

What is the amount of Phillip’s deductible casualty loss?

$2,650

$2,750

$10,250

$17,500

(LO 4-8)

Answer 31

$2,650

$72,500 AGI

$16,000	Decrease in FMV
or
$23,500	Adjusted Basis
= $16,000 Lesser of Decrease in FMV or Adjusted Basis
- $6,000	Insurance Coverage 
- $100 Floor 
- $7,250 10% of AGI
= $2,650	Deductible loss on Schedule A

Question 32

68. In which of the following situations would the taxpayer be entitled to a casualty loss deduction?

I. A taxpayer’s home is damaged by water seeping into the basement over a period of years.

II. A taxpayer’s large elm tree is killed by termite damage.

III. A taxpayer’s home is damaged by an earthquake.

IV. A taxpayer’s basement is flooded during a very heavy rainstorm.

I and III only

I and IV only

II and III only

III and IV only

I, III, and IV only

(LO 4-7)

Answer 32

III and IV only

To qualify as a casualty loss, the loss must be sudden, unusual, or unexpected. Only the earthquake damage and the damage from the rainstorm meet the definition. Water seepage into the basement over a period of years is not sudden. Termite damage is certainly not sudden.