Can a taxpayer in a federally declared disaster area claim a loss on form 4684 after they elected to take 80% of the insurance claim?

[AP]

The taxpayer had and insurance policy that covered up to $431,900 for personal belongings. They opted not to itemize and take the 80%, which is $345,520. Now they want to claim a loss for the difference ($86,380) in their 2018 return. Per client, their cost basis is estimated to be $450,000.

[George4Tacks · Accepted solution]

I don't have a citation, but IRS does not play second fiddle. If the taxpayer elects to take a reduced settlement with the insurance, IRS considers that a full reimbursement. I will put a shout out for someone that might be able to back me up with a citation.

[George4Tacks]

@TaxGuyBill can you confirm? You seemed to know about CA EITC, so how about this?

[TaxGuyBill]

I agree with you.  Although this link doesn't directly state that for a situation of 'electing' to only take part of the payment, I think it does show the concept that the tax deduction is for what the insurance won't cover.
https://www.irs.gov/publications/p547#en_US_2018_publink1000225265

As a side note, what does "opted not to itemize and take the 80%" mean?  To me, that means that $431,900 is not a proven amount, and if it was a proven amount, WHY ON EARTH would the taxpayer choose to not take $86,380 just to save some paperwork?  That seems REALLY fishy to me, and likely means the REAL amount is closer to the $350,000 mark.

[itonewbie]

Agree that the claim is based on what insurance won't cover whether or not the taxpayer submits a claim in full, in part, or not at all.  It is very clearly stated on both the F.4684 itself and the instructions.