Mary\'s diamond ring was stolen in 2013. She originally paid $8,000 for the ring
ID: 2711018 • Letter: M
Question
Mary's diamond ring was stolen in 2013. She originally paid $8,000 for the ring, but it was worth considerably more at the time of the theft. Mary filed an insurance claim for the stolen ring, but the claim was denied. Becuase the insurance claim was denied, Mary took a casulaty loss for the stolen ring on her 2013 tax return. In 2013, Mary had AGI of $40,000. In 2014, the insurance company had a "change of heart" and setn Mary $5,000 for the stolen ring. Discuss the proper tax treatment of the $5,000 Mary received from the insurance company in 2014.
Explanation / Answer
If Mary had claimed $8,000 as a tax deductible expense in the year of purchase, then it is appropriate to consider the insurance claim settlement of $5,000 as a income and proper tax will be charged in 2014.
However if the diamond ring was purchased from the income taxed already, then the income received as a settlement from insurance claim will not be tax charged