Explanation The loss of occupancy or use of a principal residence due to damage caused by storm, fire, or other casualty results in the receipt of the amount from insurance that are paid for living expenses of an individual. This amount received from insurance is excluded under the Section. 123 (a). As per Section 123 (a) General rule, when the principal residence of an individual is destroyed or damaged by storm, fire, or other casualty or an access is denied by governmental authorities to his principal residence due to threat of occurrence or occurrence of such a casualty, then under an insurance contract which are paid to reimburse or compensate such individual for living expenses incurred for his family and himself resulting from the loss of occupancy or use of such residence, such amount received by the individual is not included in the gross income. Under the Section 123 (b), up to the excess of actual living expenses over the normal living expenses, the limit is excluded, although Person DL and Person DB qualify for this exclusion. Sec. 123 (b) Limitation – For the receipt of the amounts by the taxpayer for living expenses that are incurred during any period, Subsection (a) shall apply only to the extent of the amounts that are received do not exceed the amount by which – 123 (b) (1) the loss of occupancy or use of their residence results in the actual living expenses incurred for him and his family during such period, exceed 123 (b) (2) during such period, the normal living expenses that would have been incurred for him and his family. Reg. Sec. 1.123-1 (a) (2) is expanded on Sec.123 (b). This states that up to the reimbursement of necessary and reasonable expenses that maintain their normal standard of living during the loss period, the exclusion is limited. (2) For maintaining the customary standard of living by the insured and his family members during the loss period, the amount of expenses incurred by them for the necessary and reasonable increase in living expenses are received as compensation or reimbursement. Such amounts are excluded under this section. As per Reg. Sec.1.123-1 (b) (1), in general, the excludable is for excess expenses actually incurred due to the casualty for utilities, food, transportation, and miscellaneous services. Generally, the excludable amount represents such excess expenses actually incurred due to a threat or casualty thereof, utilities, food, for extraordinary expenses for transportation, for renting suitable housing, and miscellaneous services during the period of denial of access by governmental authority or replacement or repair of the damaged principal residence. As per Reg. Sec.1.123-1 (b) (2), only the increase in the expense is considered to be an actual living expense, for expenses that are normally incurred. An increase in the amount expended for items of living expenses such as transportation and food is resulted due to the loss of occupancy or use of the principal residence. To this extent, only the increase in such costs shall be considered as actual living to be counted at the decreased amount. (3) Normal living expenses not incurred – The expenses comprising actual living expenses that would have been incurred but are not incurred as a result of the theft or casualty thereof, are the same expenses of the normal living expenses...

Concepts in Federal Taxation 2019 (with Intuit ProConnect Tax Online 2017 and RIA Checkpoint 1 term (6 months) Printed Access Card)

26th Edition

ISBN: 9781337702621

Author: Kevin E. Murphy, Mark Higgins

Publisher: Cengage Learning

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Property Insurance

Property insurance protects property from unforeseeable loss or damage and covers property owners' liability. Property insurance provides financial compensation to the property owner or renter in the event of damage or theft, as well as to someone other …

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Chapter 4, Problem 77TA

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Ascertain the income tax treatment of the receipt of the $2,150 from the insurance company.

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Eric and Susan just purchased their first home, which cost $166,000. They purchased a homeowner’s policy to insure the home for $156,000 and personal property for $93,000. They declined any coverage for additional living expenses. The deductible for the policy is $500. Soon after Eric and Susan moved into their new home, a strong windstorm caused damage to their roof. They reported the roof damage to be $26,000. While the roof was under repair, the couple had to live in a nearby hotel for three days. The hotel bill amounted to $680. Assuming the insurance company settles claims using the replacement value method, what amount will the insurance company pay for the damages to the roof?

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Jorge and his wife own a beachfront vacation home in Savannah, Georgia. During the year, high winds from a tropical storm shatter a sliding glass door and rain from the storm causes extensive water damage to the kitchen. The Savannah area qualified for federal disaster relief. Fortunately, during a calm in the storm, Jorge is able to board up the door, which limits the water damage to the kitchen. The items damaged in the storm are: Cost ValueBefore ValueAfter InsuranceProceeds Kitchen furniture $2,085 $1,325 $430 $510 TV 265 200 0 115 Refrigerator 1,000 920 90 775 Linoleum flooring 1,645 880 0 470 In addition, Jorge pays $610 to replace the sliding glass door. The insurance company will not reimburse him for the cost of the new door because the old sliding glass door did not meet the company's standards for a hurricane area. The amount of Jorge's casualty loss before considering any annual limitations that may apply is…

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Concepts in Federal Taxation 2019 (with Intuit ProConnect Tax Online 2017 and RIA Checkpoint 1 term (6 months) Printed Access Card)

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Ascertain the income tax treatment of the receipt of the $2,150 from the insurance company.

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Ascertain the income tax treatment of the receipt of the $2,150 from the insurance company.

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Chapter 4 Solutions