Question

Seth's car was completely destroyed by a tornado in a Federally declared disaster area in the current year. At the time of the accident, the car had a fair market value and an adjusted basis of $30,000. Seth used the car 100% of the time for personal use. Seth received an insurance recovery of 80% of the value of the car at the time of the accident. If Seth's AGI for the year is $50,000, his deductible loss on the car would be:

a.$30,000.
b.$10,500.
c.$900.
d.$40,000.
e.$6,000.

Answer 1

The deductible loss on Seth's car would be $10,500. When a car is destroyed by a disaster, the deductible loss is calculated as the adjusted basis of the car minus the insurance recovery. However, deductible losses are subject to limitations.

Step-by-step explanation:

The deductible loss on Seth's car would be $10,500.

When a car is destroyed by a disaster, the deductible loss is calculated as the adjusted basis of the car minus the insurance recovery. In this case, the adjusted basis of the car is $30,000 and Seth received an insurance recovery of 80% of the value of the car, which is $24,000. Therefore, the deductible loss is $30,000 - $24,000 = $6,000.

However, deductible losses are subject to limitations. The deductible loss cannot exceed the loss sustained, which is $30,000 in this case. As Seth's AGI for the year is $50,000, he can only deduct losses that exceed 10% of his AGI. 10% of $50,000 is $5,000, so the deductible loss is $6,000 - $5,000 = $1,000. However, there is also an additional $100 floor, which means the deductible loss would be $1,000 - $100 = $900.