In Year 1, Kane's residence had an adjusted basis of $250,000 and it was destroyed by a tornado (in a federally declared disaster area). An appraiser valued the decline in market value at $425,000. Later that same year, Kane received $200,000 from his insurance company for the property loss and did not elect to deduct the casualty loss in an earlier year. Kane's Year 1 adjusted gross income was $100,000. What total amount can Kane deduct as a Year 1 itemized deduction for casualty loss, after applying any limitations?

The total amount that Kane can deduct as a Year 1 itemized deduction for casualty loss is $39,900.

Explanation:

According to the Internal Revenue Service (IRS), Disaster Area Losses in a federally declared disaster refers the occurrence of a disaster in an area that the President has declared to be eligible to enjoy federal assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.

Since Kane's residence falls into the category of personal-use property or it is not totally destroyed, the amount of loss of the property is the lesser of the adjusted basis of the residence, $250,000, and the decline in market value determined by the appraiser, $425,000. Based on this, the amount of loss of the residence is $250,000.

The total amount that Kane can deduct as a Year 1 itemized deduction for casualty loss can therefore therefore be calculated as follows:

Particulars                                                     Amount ($)        

Loss amount                                                   250,000

Amount from insurance                                (200,000)  

Loss of the Taxpayer's                                    50,000

Deduct $100                                                         (100)      

Eligible Loss                                                     49,900

Limitation of 10% annual gross income        (10,000)      

Loss to be deducted                                      39,900    

Therefore, the total amount that Kane can deduct as a Year 1 itemized deduction for casualty loss is $39,900.