Question

Manny's gold watch was stolen in 2012. He originally paid $4,800 for the watch, but it was worth considerably more at the time of the theft. Manny filed an insurance claim for the stolen watch, but the claim was denied. Because the insurance claim was denied, Manny took a casualty loss for the stolen watch on his 2012 tax return. In 2012, Manny had AGI of $23,000. In 2013, the insurance company had a change of heart and sent Manny a check for $3,000 for the stolen watch. The per event floor is $100.

what should manny include in GI?

Answer 1

Manny must include the lesser of the $3,000 insurance recovery or the tax benefit received from the casualty loss deduction on his 2012 tax return in his Gross Income for 2013.

Step-by-step explanation:

Manny's situation involves the tax treatment of a recovered item after a casualty loss deduction. When Manny received the insurance reimbursement in 2013, after having taken a casualty loss deduction for the stolen watch on his 2012 tax return, he must recognize the reimbursement as income to the extent that it provided a tax benefit.

Since the insurance company sent Manny a check for $3,000 in 2013, he should calculate the tax benefit he received from the deduction and include in his Gross Income (GI) the lesser of the insurance recovery ($3,000) or the tax benefit from the loss deduction.

The '$7,500 + 25% of the amount over $50,000' tax reference information is not directly applicable to this question but serves as an example of tax brackets which could be relevant for understanding other tax computations.