Olaf lives in the state of Minnesota. In 2020, a tornado hit the area and damaged his home and automobile. Applicable information is as follows: Item Adjusted Basis FMV before FMV after Insurance Proceeds
Home $350,000 $500,000 $100,000 $280,000
Auto 60,000 40,000 10,000 20,000
Because of the extensive damage caused by the tornado, the President designated the area a Federal disaster area. Olaf and his wife, Anna, always file a joint return. Their 2019 tax return shows AGI of $180,000 and taxable income of $145,000. In 2020, their return shows AGI of $300,000 and taxable income (exclusive of the casualty loss deduction) of $225,000. Assume the taxpayers are in the 22% tax bracket in 2019 and the 24% tax bracket in 2020.
Determine the amount of Olaf and Anna's loss and the year in which they should take the loss.
Item
Amount of Loss Home $
Auto
Total loss $
Less: statutory floor amount
Loss before statutory % of AGI $
Amount of loss on last year's return:
Loss $
Less: statutory % of AGI
Total loss $
Amount of loss on current year's return:
Loss $
Less: statutory % of AGI
Total loss $
Olaf and Anna should include the loss on the return, because the tax savings is greater.

1. Amount of loss $ 70,000

Home

Auto $10,000

Total loss$80,000

Less - statutary floor amount$100

Loss before statutory % of AGI$79,900

Amount of loss on last year’s return:

Loss $79,900

Less: 10% of AGI 180000*10%$18,000

Total loss $61,900

Amount of loss on current year's return:

Loss$79,900

Less: 10% of AGI $300,000*10%$30,000

Total loss$49,900

2. Olaf and his wife Anna should include the loss on the PRIOR YEAR'S because the tax savings is $1,642 greater.

Explanation:

Calculation to Determine the amount of Olaf and Anna's loss and the year in which they should take the loss

Amount of loss $ 70,000

Home

($350,000-$280,000)

Auto $10,000

($40,000-$10,000=$30,000)

($30,000-$20,000)

Total loss$80,000

($70,000+$10,000)

Less - statutory floor amount$100

Loss before statutory % of AGI$79,900

($80,000-$100)

Amount of loss on last year’s return:

Loss $79,900

($80,000-$100)

Less: 10% of AGI $180,000*10%$18,000

(10%*$180,000)

Total loss $61,900

($79,900-$18,000)

Amount of loss on current year's return:

Loss$79,900

($80,000-$100)

Less: 10% of AGI $300,000*10%$30,000

(10%*$300,000)

Total loss$49,900

($79,900-$30,000)

2. Calculation to determine what Olaf and Anna should include the loss on the return, because the tax savings is greater.

Based on the information given in a situation where Olaf and his wife apply the loss to the prior year which means that rate of 22% will be use for the benefit of the loss

Taxable income = ($145,000 − $61,900)

Taxable income = $ 83,100

Calculation for when Loss is taken on the PRIOR year's return:

Tax savings=(22% × $61,900)

Tax savings= $ 13,618

In a situation where the loss is been applied to the current year which means that the rate of 24 % will be use for the benefit of the loss

Taxable income = ($225,000-$49,900)

Taxable income= $ 175,100

Calculation for the loss is taken on the CURRENT year's return:

Tax savings= (24% × $49,900)

Tax savings =$ 11,976

Therefore based on the above calculation Olaf and his wife Anna should include the loss on the PRIOR YEAR'S return reason been that the tax savings is $1,642 ($13618 − $11976) greater.

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