Question

In 2017, Todd's house burned down and all contents were lost. He received $350,000, although his house was worth only $125,000 and the contents were worth another $125,000. He will have to include the difference in his gross income.

a) True
b) False
c) It depends on Todd's insurance policy.
d) Only if Todd itemizes his deductions.

Answer 1

Todd may need to report the excess insurance proceeds as gross income if they exceed the adjusted basis of his property, but special tax provisions or exclusions for casualty losses might apply.

Step-by-step explanation:

The student's question concerns whether Todd must include the difference between the insurance proceeds received and the actual value of the lost property in his gross income. Since Todd received $350,000 from insurance when the total value of his house and contents was $250,000, the real question becomes whether the excess $100,000 is taxable income. Generally, insurance proceeds for personal property losses are not taxable income unless they exceed the adjusted basis of the property. If Todd's insurance payout is more than the cost basis of his home and contents, then the excess would typically be considered a gain and may need to be reported as income. However, there are exclusions and special tax provisions related to casualty losses that can affect this determination.