Tax Topic 10 - Tax Deduction for Casualties and Theft Losses

Here, you will become aware of the special rules for the disaster area losses such as when your property is damaged due to storm, fire, car accident and events of that sort. In addition, you will explore what to do when someone steals your property or when you have a loss of deposit as in the event that your bank becomes insolvent or files bankruptcy. In this topic you will learn what is a casualty and theft loss and how to figure the amount of your loss. You will learn what to do when you receive insurance reimbursements for your loss and when and how to report a casualty or theft loss.

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Use IRS Publication 547  to complete this topic.

Complete a Tax Return:

Complete a Form 4684 for Andrew Martinez (699-03-6021). On August 30, 2009, a severe storm caused extensive property damage to Andrew's home. The original purchase of the home and the landscaping had a original basis of $91,200. The basis is allocated between the land ($18,000) and the building ($73,200) including the trees and ornamental shrubs Andrew planted on the grounds surrounding his home. The fair market value immediately before the storm was $100,000 ($82,000 for building and $18,000 land); immediately afterwards the value was $70,100 ($52,100 for building and $18,000 for the land). Insurance reimbursement of $15,000 is received to cover the total damage.

Complete a  Schedule A using the results from Form 4684. After that prepare a Federal Form 1040. Use the information provided here, assume nothing else.

Andrew and his girlfriend have been together for 1 year. They do not have any children and are not married. They lived together all of 2009. Her name is Cindy Thomson (SSN: 012-92-8910). Cindy did not work because she was a student for all of 2009. They plan to get married when Cindy graduates from school.

In addition to his earnings, Andrew had the following for 2009:
bulletUnemployment compensation $1,373.00

Use this Form W-2 for address and income information. All information is current.

 

1. Look at the Form 1040 you prepared for Andrew Martinez. What is the amount on Form 1040, Line 40a?

A. $11,845.
B. $12,274.
C. $12,095. 
D. $12,155.

2. Look at the Form 4684 you prepared for Andrew Martinez. What is the amount on Form 4684, Line 22?

A. $11,845.
B. $14,400.
C. $14,900. 
D. $0.

3. A theft in the taking and removing of money or property with the intent to deprive the owner of it. Theft includes the taking of money or property by the following means, except

A. Blackmail and extortion.
 B. Money loaned to a friend who unexpectedly did not pay you back.
 C. Kidnapping for ransom.
D. Burglary and robbery. 

4. The taking of money or property through fraud or misrepresentation is theft if it is illegal under state and local law.                       

True False

5. Loss of property due to progressive deterioration is deductible as a casualty loss.

True False

6. A casualty loss is deductible if the damage or destruction is caused by accidentally breaking articles such as glassware or china under normal conditions.                       

True False

7. The simple disappearance of money or property is not theft. For example, a car door is accidentally slammed on your hand, breaking the setting of your diamond ring. The diamond falls from the ring and is never found. The loss of the diamond

A. Is not a casualty because the disappearance was a simple disappearance.
 B. Is not a casualty because the event was not sudden , unexpected or unusual.
 C. Is a casualty because the event was sudden, unexpected, or unusual.
 D. None of the above. 

8. You bought a new chair 4 years ago for $300. In April, a fire destroyed the chair. You estimate that it would cost $500 to replace it. If you had sold the chair before the fire, you estimate that you could have received only $100 for it because it was 4 years old. The chair was not insured. Your loss is

A. $ 500.
 B. $ 300.
 C. $ 400.
 D. $ 100.

9. Your home was extensively damaged by a tornado. Your loss after reimbursement from your insurance company was $ 10,000. Your employer set up a disaster relief fund for all the employees. Employees receiving money from the fund had to use it to rehabilitate or replace their damaged or destroyed property. You received $ 3,000 from the fund and spent the entire amount on repairs to your home. Your casualty loss before applying the deduction limits is

A. $ 3,000.
 B. $ 10,000.
 C. $ 7,000.
 D. $ 6,000.

10. You have a car insurance policy with a $ 500 deductible, because your insurance did not cover the first $ 500 of an auto collision, the $500 would be deductible (Subject to the $100 and 10% limits).             

True False

11. Several years ago, you purchased silver dollars at face value for $250. This is your adjusted basis in the property. Your silver dollars were stolen this year. The FMV of the coins was $1,500 just before they were stolen, and insurance did not cover them. Your theft loss is

A. $1,500.
 B. $250.
 C. $850.
 D. $150.

12. In figuring a casualty loss on personal-use real property, the entire property (including any improvements, such as buildings, trees, and shrubs) is treated as one item. Figure the loss using

A. The decrease in FMV of the entire property.
 B. The adjusted basis of the entire property.
 C. The smaller of A or B above.
 D. None of the above.

13. Do not reduce your casualty loss by insurance payments you receive to cover living expenses if you lose the use of your main home because of a casualty

A. And you use your main home after the casualty occurred.
 B. And government authorities do not allow you access to your main home because of a casualty or threat of one.
 C. Either of A or B above.
 D. None of the above.

14. In November 2009, you had a collision while driving your personal car. Repairs to the car cost $950. You had $100 deductible collision insurance. Your insurance company agreed to reimburse you for the rest of the damages. You casualty loss for 2009 is

A. $950.
 B. $850.
 C. $100.
 D. $0

15. You have a casualty loss if your home is unsafe due to dangerous conditions existing before the disaster.

True False

16. The cost of restoring landscaping to its original condition after a casualty may indicate the decrease in FMV. You may be able to measure your loss by what you spend on

A. Removing destroyed or damaged trees and shrubs, minus any salvage you receive.
 B. Pruning and other measures it takes to preserve damaged trees and shrubs.
 C. Replanting necessary to restore the property to its approximate value before the casualty.
 D. All of the above.

17. Deductible casualty losses can result from a number of different causes, excluding the following.

A. Mine cave-ins.
 B. Terrorist attacks.
 C. Vandalism.
 D. A fire if you willfully set it, or pay someone else to set it. 

18. A casualty is deductible if the damage or destruction is caused by the following, except

A. A family pet suddenly and unexpectedly damaged a household item.
 B. Terrorist attacks.
 C. Floods.
 D. A car accident due to your willful negligence.

19. A loss resulting from damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.

A. A casualty loss.
 B. A theft loss.
 C. A loss of deposit.
D. A sudden loss. 

20. A loss resulting from the taking and removing of money or property with the intent to deprive the owner of it. The taking of property must be illegal under the law of the state where it occurred and it must have been done with criminal intent.

A. A casualty loss.
 B. A theft loss.
 C. A loss of deposit.
D. A sudden loss. 

21. A loss resulting when a bank, credit union, or other financial institution becomes insolvent or bankrupt.

A. An institutional loss.
 B. A theft loss.
 C. A loss of deposit.
D. A sudden loss. 

22.  Frank's car was completely destroyed in an automobile accident for which Frank was at fault due to drunk driving. He did not file a claim with his insurance company because he feared his premiums would be raised. Besides he fled the scene of the accident because  he was afraid he would get arrested. His loss was $4,500. His policy had a $1,000 deductible. How much casualty loss can Frank claim on his return (before the deduction limits)?

A. $0
 B. $4,500
 C. $3,500
 D. $1,000

23.  After you have figured your casualty or theft loss, you must figure how much of the loss you can deduct. A loss on property that you own for your personal use is subject to

A. The $100 rule.
 B. 10% rule.
 C. 2% rule.
 D. Both A and B are correct.

24.  Jane bought an old mountain cabin as a second home and began to remodel it. Her AGI for 2009 was $39,000.  Immediately after she had removed the old appliances and cleaned the cabin, a fire destroyed it. The cost of the cabin was $100,000 (including $10,000 for the land). The fair market value (FMV) of the property before the fire was $120,000 ($105,000 for the building and $15,000 for the land). After the fire, the FMV was $15,000 (value of the land). Jane collected $85,000 from her insurance company. What is her casualty loss deduction?

A. $11,100
 B. $14,900
 C. $10,400
 D. $0

25. In September of 2009, two months after Jim and Betty finished constructing a barn, it was completely destroyed by a hurricane. Their adjusted basis in the barn was its cost, $40,000. It was not covered by insurance. The entire community has been declared a federal disaster area. Jim and Betty may elect to do which of the following?

A. Deduct the loss in either 2008 or 2009.
 B. Deduct the loss in either 2007 or 2008.
 C. Allocate the loss between 2008 or 2009.
 D. Deduction has to be for 2009 because losses are deducted when losses occur.

26. Your antique oriental rug was damaged by your new puppy before the puppy was house broken. As a result,

A. Because the loss was unexpected and unusual, the loss is deductible as a casualty loss.
 B. Because the loss was not unexpected and unusual, the loss is not deductible as a casualty loss.
 C. Because the loss was sudden, the loss is deductible as a casualty loss.
 D. None of the above.

27. Your home was damaged by a hurricane. Relatives and neighbors made cash gifts to you that were excludable from your income. You used part of the cash gifts to pay for repairs to your home. There were no limits or restrictions on how you could use the cash gifts. It was an excludable gift so the money you received and used to pay for repairs to your home

A. Reduces the basis of the property.
 B. Reduces the casualty loss on the damaged home.
 C. Does not reduce your casualty loss on the damaged home.
 D. None of the above.

28. To deduct a casualty loss, you must be able to show that there was a casualty . You also must be able to support the amount you take as a deduction. For casualty loss proof, you should be able to show

A. The type of casualty, when it occurred and that the loss was a direct result of the casualty.
B. That you were the owner of the property, or if you leased the property from someone else, that you were contractually liable to the owner for the damage.
C. Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery.
 D. All of the above.

29.  To deduct a theft loss, you must be able to show that there was a theft. You also must be able to support the amount you take as a deduction. For theft loss proof, you should be able to show

A. That your property was stolen and when you discovered that your property was missing.
B. That you were the owner of the property and whether a claim for reimbursement exists for which there is a reasonable expectation of recovery.
 C. That you did not know the person who stole your property.
 D. Both A and B are correct.

30. The decrease in FMV used to figure the amount of a casualty or theft loss is the difference between the property's fair market value immediately before and immediately after the casualty or theft. The FMV of property immediately after a theft is

A. Considered to be the same as the value immediately before stolen because the item has not changed value with the change of owner.
 B. Considered to be zero since you no longer have the property.
C. Considered to be a lot less since stolen property is always sold for a lot less.
D. None of the above.

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Revised: 05/14/12