asking anyone who can simplify this strange accounting problem I thought i understood.
A tornado damaged Angela’s home. Prior to the storm, her living expenses were $1,200 a month. Angela had to move out of her home for three months while it was being fi xed. During that time, her living expenses increased by $800 a month. The insurance company reimbursed Angela $1,000 a month during the three months to cover her living expenses. The amount that Angela must include in gross income is:
there were four answers: a. $0 b. $2400 c. $600 d. $3000.
I choose “A” because from the description of the problem, Angela’s expenses were first $1,200. After the storm hit, her expenses were increased by $800. (what i understood was $1,200[original living expenses] + $800 [the increase in expense after storm]. Theoretically, she should have a living expense of $2,000 for three months. Since the insurance company reimburses her for $1,000 per month for 3 months, she can’t include any money in gross income ($1,000 - $2,000 = -$1,000). I was marked wrong and told the answer is “C”. the question is “Why is it “C”?”
ok, so from the post, if I understand correctly: essentially, if Angela had lost her home to the tornado, then she wouldn’t have to calculate the insurance payments with regards to her casualty loss.
the inclusion in income is based only on the increase on temporary living expenses, not your living expenses overall. right?
The second part of your post is correct, but the first part of your post is a little confusing. You would use the same formula for figuring out how much of Angela’s living expense reimbursements should be included in taxable income regardless of whether the house was partially damaged or completely destroyed.
The key here is that these insurance payments are for living expenses, not for the property. This computation is completely separate from the computation used for determining how much you can deduct as a casualty loss.
Sorry if I misunderstood the first part of your post.