Question

33. LO.3, 4,8 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 Adjusted Basis Insurance Proceeds FMV before FMV after Item Home Auto $350,000 60,000 $500,000 40,000 $100,000 10,000 $280,000 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. Determine the amount of Olaf and Anna's loss and the year in which they should take the loss.

Answer 1

Solution ;

The amount of the loss before the 10% of AGI limitation is computed as follows :

Home ( $ 35,000 - $ 280,000 )              70,000

Auto ( $ 30,000 - $ 20,000 )                     10,000

less . $ 100                                              ( 100 )

Loss before 10% of AGI                             $79900

Because the president declared the area a disaster area , Olaf and Anna cloud claim the loss on

last year's return .

Amount of loss on last year's return               $79,900

Less. 10% of AGI ( 10% * $ 180,000 )            ( 18,000 )

Total loss                                                      61900

Amount of loss on last year's return :

Loss                                                         $ 79,900

Less . 10% of AGI (10% * $300,000 )            (30000)

Total loss                                                   (49900)

If Olaf and Anna apply the loss to the prior year , the benefit of the loss will be at the rate of

25% because taxable income will be 83100 ($145,000 - 61900) . If the loss is applied to the

current year , the benefit will be at a rate of 28% because taxable income will be 175100

($225,000 - 49900) . The tax savings will be 15475 (25% * $61900) if the loss is taken on the

prior year's return and $13972 (28 * $49900) if the loss is taken on the current year's return .

Therefore , Olaf and Anna should include the loss on prior year's return , because the tax-

savings is $1503 ($15475 - $13972) greater .