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REG CPA Practice Questions: Casualty Loss Deductions
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May 3, 2024
In this video, we walk through 5 REG CPA exam practice questions on deducting casualty losses as itemized deductions. Important Links Link to the free study training webinar mentioned in the video: https://www.superfastcpa.com/strategic-study See the full post for this video: https://www.superfastcpa.com/reg-cpa-practice-questions-explained-casualty-loss-deductions/ See the other REG walkthrough videos here: https://www.superfastcpa.com/free-reg-cpa-practice-question-walkthroughs/ 00:00 Intro 00:55 Question 1: Nonqualifying Casualty Loss 02:05 Question 2: The Casualty Loss Calculation 04:44 Question 3: Two Federally Declared Disasters 07:21 Question 4: Fully Reimbursed by Insurance 08:27 Question 5: A Situation Where the Adjust Basis is Lower than the FMV 09:48 Pillar Topics
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Welcome to another reg walkthrough video
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I'm Logan, and in today's video, we're going to be going over casualty losses as itemized
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deductions, and we're going to be doing that the Superfast CPA way, which is getting straight
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into questions to learn the material. If this is the first thing you're seeing from us, and if you don't know much about our
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strategies, make sure to go to superfast CPA.com and sign up for our free one-hour webinar
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training, where we go over the six key ingredients to passing the CPA exam
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Again, it's only one hour long, it's free, and it will save you months and months of
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struggling with your CPA exam process. Definitely check it out. Also, if you like the idea of
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studying questions first, make sure you check out our superfast CPA app where we not only have
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audio notes and review notes, but we have five question mini quizzes that you can access easily
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on your phone so you can be practicing throughout the day. Again, make sure to check out the
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webinar. The link will be in the description and it will look like this. And with that said
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let's go ahead and dive straight into the questions. Okay, here's question one. John experienced
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a casualty loss when a severe storm damaged his personal residence. The fair market value of his home
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decreased by $25,000 due to the damage. He received an insurance payout of $15,000. Before the storm
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the adjusted basis of his home was $200,000. John's adjusted gross income for the year is $100,000
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Based on this information, what is the deductible casualty loss on John's tax return
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All right, we don't really know anything about how casualty losses can be included on an individual's
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tax return. So let's go straight into the answer to learn how this works. All right, let's look at the
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answer. And the answer is $0, so he can't include any of it. Because the loss was not in a federally
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declared disaster area, the casualty loss is not deductible for personal use property. Therefore
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John cannot deduct any amount for the casualty loss on his tax return. Okay, so that's the first rule
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right there. For casualty losses on personal property, if it's not in a federally declared disaster
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area, and it didn't mention anything about a federally declared disaster area up here. It only said
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severe storm. Then you can't deduct it. It's as simple as that. That's the first rule. So let's go
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ahead and go to the next question to learn more about the calculation. All right, here's question two
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Samantha's primary residence sustained damage during a hurricane, which was declared a federal disaster
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by the government. Okay, there we go. That tells us right there that this could potentially be counted
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as a casualty loss on the tax return. The fair market value of her home was reduced by
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$50,000 as a result of the storm. She received $20,000 from her insurance company for the damages
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Prior to the hurricane, her home's adjusted basis was $200,000. Samantha's adjusted gross income
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for the year is $120,000. What is the maximum casualty loss deduction Samantha can claim on her
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tax return? Okay, so now this one will be able to be counted as a casualty loss, but we still
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don know how to calculate it because the first one wasn even able to be calculated because because it wasn in a federally declared disaster yet So let go into the answer for this one to learn how the calculation works Okay so she can deduct This calculation is a little bit involved
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but once you understand how it works, it's pretty easy and straightforward
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and it's always the same. So here's the steps. So first, you have to identify the smaller of the two amounts
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either the decrease in fair market value or the adjusted basis of the home
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So in this case, the decrease in fair market value was $50,000, and that's less than the $200,000
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less than the $200,000 adjusted basis. So that's what we start with. Then you subtract the insurance
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reimbursement to find the actual loss. So you take the $50,000 less that $20,000 insurance reimbursement
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and that's $30,000. So that's the actual casualty loss right there. But then there are some limits to
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it. So first, reduce the loss by $100 per casualty loss. It's kind of a strange little rule there
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but that's how it works. $30,000 less $100 is $29,900. And then you have to apply a 10% AGI
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limitation or basically a 10% AGI floor. So 10% of 120,000 AGI is $12,000. So you subtract the $12,000
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from the total casualty loss after that $100. And that gives you the allowable deductible
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casualty loss on the person's tax return. Okay. And since it was in a federally declared
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disaster area, again, we can deduct the casualty loss. So again, it's a little bit involved
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So just to go over the steps one more time. You identify the smaller of the decrease in fair market value
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or the adjusted basis, then you subtract any insurance reimbursements, then you subtract $100 per casualty loss, specifically $100
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then you subtract 10% of the AGI, and whatever's left over is the allowable casualty loss deduction
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So that's pretty much the calculation right there. We're going to practice it in a few more questions just to drill it in a little bit more
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Let's go to the next question. All right, here's question three. Carlos owns two properties, a primary residence
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and a vacation home. This year, both properties were damaged in different federally declared
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disaster events. His primary residence suffered $60,000 in damage due to a wildfire, and he received
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$35,000 from insurance. The adjusted basis of the primary residence before the wildfire was $300,000
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His vacation home was damaged by a flood incurring $40,000 in damage, with $25,000 covered by
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insurance. The adjusted basis of the vacation home before the flood was $150,000. Carlos' adjusted
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gross income for the year is $150,000. What is the total amount Carlos can claim for casualty
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loss deductions on his tax return for both properties? Okay, honestly, we've learned everything
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that you need to know to be able to calculate this. It's a little bit more involved because it has
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two properties, but take a second, pause the video, do the calculation that you just learned
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in question two and see if you can get the correct answer with these two properties that are
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involved And when you ready come back and we will look at the answer All right here is the answer So let go over the calculation one more time So you first calculate it for the primary residence And so the loss for that is the lower of the fair market value or the adjusted basis
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Obviously the $60,000 is less than the adjusted basis mentioned up here, which I believe was the $300,000
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And then you subtract the insurance reimbursement. So that gives you a $25,000 loss
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And then again, for every separate casualty loss, you subtract $100. So that's $24,900 of casualty loss from the primary residence
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Then for the vacation home, again, you do the same thing. And the lower of the two was $40,000
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You subtract the insurance reimbursement. That gives you $15,000. Then you, again, subtract the $100
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That's $14,900. So now you apply the 10% AGI limitation to the combined loss
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And so you would subtract $15,000 from the total $39,800. and that gives you $24,800 of casualty loss that can be used as an itemized deduction
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So again, a little bit more involved. But once you understand the process, it's not too difficult
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It's just one kind of convoluted calculation. And once you understand how that calculation works, you've pretty much got casualty losses down
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So just one more time. Find the lower of the fair market value or the adjusted basis
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Subtract insurance reimbursements. Then subtract $100. then subtract 10% of AGI, and as long as it was in a federally declared disaster area
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that is the amount of loss that can be deducted as a casualty loss
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Let's go to the next question just to hammer at home a little bit more. Here's question four
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Denise's car was damaged in a hailstorm that was declared a federal disaster. The car's fair market value decreased by $5,000 due to the damage
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Fortunately, her auto insurance policy provided her with a $5,000 payout. Denise's adjusted gross income for the year is $80,000
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What is the deductible casualty loss on Denise's tax return for the car damage
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Okay, you know how to do this. Pause the video. See if you can get the correct calculation and the correct answer
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And when you're ready, come back, we'll look at the answer just to make sure. All right, here's the answer
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So, zero dollars. So even though it was a federally declared disaster area, she can't take any of it
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And why is that? Because her insurance reimbursed the full amount of damage
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The deductible casualty loss is calculated as the lower of the decrease in fair market value or the adjusted basis, okay
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minus insurance reimbursement received. So since Denise received a full insurance payout that covered the entire loss
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there is no remaining loss to deduct. Therefore, the deductible casualty loss on our tax return for the car damage is $0
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Pretty straightforward. If your insurance covers the whole loss, you have no loss to report on your tax return
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All right, let's go to the last question. Okay, here's the last question. Question five
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During a hurricane, which was declared a federal disaster, Laura's personal use vacation home incurred significant damage
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The fair market value of the home decreased by due to the storm However the adjusted basis of the home is only Laura received an insurance reimbursement of for the damage Her adjusted gross
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income, AGI for the year, is $90,000. What is the amount of casualty loss Laura can claim
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on her tax return for the vacation home damage? Okay, this is the last question. See if you
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can figure it out, pause the video. And when you're ready, come back and you'll see that you've
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learned how to do this. All right, here is the answer. $10,900. So you know the steps. We did
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determine the loss by taking the lower of the decrease in firm market value or the adjusted
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basis of the property. And in this case, actually, the lower of the two is the adjusted basis
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which is $120,000. So then you subtract the insurance reimbursement of the $100,000. That gives
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you $20,000. Subtract the $100. Then you subtract 10% of AGI, which is $90,000 times 10% $9,000
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And so after subtracting that, you get $10,900 of casualty loss that you can deduct on your tax return
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Again, this concept is pretty straightforward once you understand how the calculation works
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So let's finish the video by doing one more part of the Super Fast CPA strategy
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which is something called Pillar Topics. So Pillar Topics, if you don't know much about our strategies
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basically after you've done the questions or even while you're doing the questions, you will realize the topics and the concepts that you were supposed to learn
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from doing those questions according to your review course. These are the things that you've seen three, four times during your study session
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and you know that they are obviously important. So let's take a second and make pillar topics based off of the questions that we just went over
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So number one, personal property casualty losses can only be deducted if from a federally declared disaster
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That's the easiest part right there. If it's not from a federally declared disaster, you cannot deduct any casualty losses from personal property damage
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If it is in a federally declared disaster, here is. is the calculation. So first take the lower of the decrease in fair market value or adjusted
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basis of the property. Subtract any insurance reimbursements. Subtract $100 per casualty loss
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And then finally, subtract 10% of AGI. The remainder is the allowable
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casualty loss as a deduction in the current year. All right. It's that simple
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With that said, that's the end of the video. Be sure to go to superfastcpa.com and check out our free one-hour webinar
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Again, it's only one hour long. It will save you months and months of struggling with your process
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Also, if you liked going through questions as your main learning material, be sure to check out our Superfast CPA app, where we have five question mini quizzes
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that you can take on the go so you can continually be learning throughout the day
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I hope this helped, and I'll see you in the next. next video
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