In 2011, the Chens' pleasure boat was severely damaged by a hurricane in an area that was declared a federal disaster area. They had AGI of $110,000 in 2011. The following information relates to the craft:
cost basis $95000
FMV before casualty $145000
FMV after casualty $25000
The Chens had insurance and received an $80,000 insurance settlement. What is the allowable casualty loss deduction for the Chens in 2011?
A. $50,000
B. $15,000
C. $3,900
D. $3,000
is it C
To determine the allowable casualty loss deduction for the Chens in 2011, you need to calculate the actual loss suffered by comparing the fair market value (FMV) before and after the casualty.
The formula for calculating the deductible casualty loss is: (Adjusted cost basis - Insurance reimbursement - FMV after casualty).
In this case, the adjusted cost basis is $95,000, the insurance reimbursement is $80,000, and the FMV after the casualty is $25,000.
Using the formula, the deductible casualty loss would be:
$95,000 - $80,000 - $25,000 = -$10,000
However, casualty losses are subject to limitations for individuals. The loss must exceed 10% of the taxpayer's adjusted gross income (AGI) and there is a $100 reduction per casualty. In this case, the Chens' AGI is $110,000.
To calculate the actual allowable casualty loss deduction, we subtract the limitations from the calculated loss:
-$10,000 - (10% * $110,000) - $100 = -$10,000 - $11,000 - $100 = -$21,100
Since the result is negative, indicating a non-deductible loss, the Chens cannot claim a casualty loss deduction in 2011.
Therefore, the correct answer is not C.