Final answer:
Randy's deductible tax loss for the casualty, after applying all IRS-required reductions ($100 and 10% of AGI), is $10,900. This calculation uses the lower of the car's adjusted basis or fair market value, which is $18,000, and then applies the IRS's specific reduction guidelines.
Step-by-step explanation:
The question pertains to calculating Randy's deductible tax loss for a casualty loss on his car in a Federally Declared Disaster Area, which is an aspect of tax preparation within business and personal finance. To determine the tax deductible loss, we take the lesser of the car's adjusted basis or its fair market value before the casualty. Here, Randy's basis in the car is $25,000, and the fair market value before the accident is $18,000. Since the car is completely destroyed and there is no insurance reimbursement, we use the lower fair market value of $18,000.
The IRS allows taxpayers to deduct casualty losses, but it requires that they must first reduce the loss amount by $100 and then further reduce the total by 10% of their adjusted gross income (AGI). In Randy's case, his AGI is $70,000. So, the calculation for his deductible loss would be: $18,000 - $100 (the IRS reduction) = $17,900. Then, subtract 10% of his AGI: 10% of $70,000 is $7,000. Therefore, $17,900 - $7,000 = $10,900 is Randy's deductible tax loss for the casualty after all applicable floor limitations.
Understanding casualty loss deductions is essential, especially for those who encounter unfortunate events such as natural disasters without any insurance coverage—as in the case of Randy. While the provided example of how automobile insurance might work among 100 drivers shows the concept of risk pooling and how insurance companies collect premiums to cover damages, it doesn't directly relate to the IRS tax deduction rules for casualty losses.