Question

Olaf lives in the state of Minnesota. In 2020, a tornado hit the area and damaged his home and automobile. Applicable information is as follows:

Item Adjusted Basis FMV before FMV after Insurance Proceeds Home $350,000 $500,000 $100,000 $280,000 Auto 60,000 40,000 10,000 20,000

Because of the extensive damage caused by the tornado, the President designated the area a Federal disaster area.

Olaf and his wife, Anna, always file a joint return. Their 2019 tax return shows AGI of $180,000 and taxable income of $145,000. In 2020, their return shows AGI of $300,000 and taxable income (exclusive of the casualty loss deduction) of $225,000.

Assume the taxpayers are in the 22% tax bracket in 2019 and the 24% tax bracket in 2020.

Determine the amount of Olaf and Anna's loss and the year in which they should take the loss.

Item Amount of Loss Home $ Auto Total loss $ E Less: statutory floor amount Loss before statutory % of AGI Amount of loss on last year's return: Loss $ Less: statutory % of AGI Total loss Amount of loss on current year's return: Loss $ Less: statutory % of AGI IO Total loss $

Answer 1

item	Amount of loss $
Home (350000-280000)	$ 70000
Auto (30000-20000)	10000
Total loss	80000
less - statutary floor amount	100
Loss before statutory % of AGI	79900
Amount of loss on last year’s return	79900
LOss	18000
Less: 10% of AGI 180000*10%	61900
Total loss
Amount of loss on current year's return
Loss	79900
Less: 10% of AGI 300000*10%	30000
Total loss	49900

Adjusted basis for auto is $30,000 (40,000 -  10,000) since he did not get coverage for the full year.

2)

If Olaf and his wife Anna apply the loss to the prior year,

the benefit of the loss will be at a rate of 22%

taxable income will be ($145000 − $61,900). = $ 83100

If the loss is applied to the current year

taxable income will be ($225000-$49900) = $ 175100

the benefit will taxed at a rate of 24%

if the loss is taken on the prior year's return

The tax savings will be (22% × $61,900) = $ 13618

if the loss is taken on the current year's return

and (24% × $49,900) =$ 11976

Therefore, Olaf and Anna should include the loss on the prior year's return, because the tax savings is $1,642
($13618 − $11976) greater.