Question

In 2016, Sarah (who files as single) had silverware worth $10,000 (basis $6,000) stolen from her home. Sarah's insurance company told her that her policy did not cover the theft. Sarah's other itemized deductions last year were $2,000. She had AGI of $30,000 last year. In August of 2017, Sarah's insurance company decided that Sarah's policy did cover the theft of the silverware and they paid Sarah $5,000. Determine the tax treatment of the $5,000 received by Sarah during 2017.
a. $5,000 should be included in gross income.
b. Last year's return should be amended to include the $5,000.
c. None of the $5,000 should be included in gross income.
d. $2,900 should be included in gross income.
e. None of these choices are correct

Answer 1

Answer:

C) None of the $5,000 should be included in gross income.

Explanation:

During 2016, Sarah's itemized deductions (other than the stolen silverware) were only $2,000. If Sarah wanted to deduct the stolen silverware, she could have taken a casualty loss = $6,000 - $100 - $3,000 = $2,900. Her total itemized deductions would equal $2,000 + $2,900 = $4,900.

But during that year, Sarah should have opted for a standard deduction of $6,300 which is higher than her itemized deductions. That means that Sarah didn't claim any deduction for her silverware, so any money received from the insurance company should not be included in her gross income.