Noelle's diamond ring was stolen in November 2017. She originally paid $8,000 for the ring, but it was worth considerably more at the time of the theft. Noelle filed an insurance claim for the stolen ring, but the claim was denied. Because the insurance claim was denied, Noelle took a casualty loss for the stolen ring on her 2017 tax return. In 2017, Noelle had AGI of $40,000. After Noelle threatened legal action, in early 2019, the insurance company had a "change of heart" and sent Noelle a check for $5,000 for the stolen ring. Determine the proper tax treatment of the $5,000 Noelle received from the insurance company in 2019.

Mary filed her claim, but it was denied so she was right to take the casualty loss on 2013. Now in 2014 she has to include as gross income the tax benefit she received. In order to calculate that, we have to use the $100 and 10% of AGI Floors $8,000 (loss on the ring) - $100 (deduction floor) - $4,000 (10% AGI Floor) = $3,900 that she must report as income on her 2014 gross income.

Explanation:

Section 7-3b on page 7-9 of the text tells us that "If there is a theft loss which is computed like other casualty losses expect that the timing is when the loss is discovered instead of when it happens. Because you might not discover someone embezzled for years you can still recognize the loss when you do discover it.