Final answer:
The total loss from each separate casualty or theft is reduced by a $100 floor, and the aggregate of these losses must be reduced by 10% of the taxpayer's AGI to determine the deductible amount.
Step-by-step explanation:
The student's question pertains to the rules for deducting casualty and theft losses on a tax return. In this context, the total loss from each separate casualty or theft event is subject to a threshold before a deduction can be claimed. To answer the student's question directly: The total loss from each separate casualty or theft during the year is reduced by a $100 floor and the combined losses from all casualties for the year is reduced by 10% of Adjusted Gross Income (AGI).
This is calculated by taking the total loss from the casualty, subtracting any reimbursement (such as insurance proceeds), then further reducing that amount by $100. After all casualty losses have been reduced by this $100 floor, they are then combined. The total of these combined losses must then be reduced by 10% of the taxpayer's AGI to arrive at the deductible amount.
For example, if a taxpayer with an AGI of $50,000 experiences two separate casualty events with losses of $1,000 and $2,000 respectively, after insurance, here is how the calculation would work: The two events are reduced by $100 each, becoming $900 and $1,900. These are combined to $2,800. We then calculate 10% of AGI ($50,000), which is $5,000. Since $2,800 is less than $5,000, in this example, there would be no deductible casualty loss because the total combined loss does not exceed 10% of AGI.