Last Year, Sarah (Who Files as Single) Had Silverware Worth

question 28

Multiple Choice

Last year, Sarah (who files as single) had silverware worth $10,000 (basis $6,000) stolen from her home. Sarah's insurance company told her that her policy did not cover the theft. Sarah's other itemized deductions last year were $10,000. She had AGI of $30,000 last year. In August of the current year, Sarah's insurance company decided that Sarah's policy did cover the theft of the silverware and they paid Sarah $5,000. Determine the tax treatment of the $5,000 received by Sarah during the current year.

• A)None of the $5,000 should be included in gross income.
• B)$2,900 should be included in gross income.
• C)$5,000 should be included in gross income.
• D)Last year's return should be amended to include the $5,000.
• E)None of the above.

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Definitions:

Cash Flows

The sum total of financial transactions directed into and out of a corporation, markedly influencing its cash flow.

Depreciable Asset

An asset that loses value over time and for which depreciation can be applied for tax and accounting purposes.

Capital Gain

The profit earned from the sale of an asset that has increased in value over its purchase price.

Selling Price

The price at which a product or service is sold to customers, which can cover the cost of production and include a profit margin.