Tax Benefit Rule (LO. 3)

How does the tax benefit rule apply in the following cases?

a. In 2014, the Orange Furniture Store, an accrual method taxpayer, sold furniture on credit for $1,000 to Sammy. The cost of the furniture was $600. In 2015, Orange took a bad debt deduction for the $1,000. In 2016, Sammy inherited some money and paid Orange the $1,000 he owed. Orange was in the 35% marginal tax bracket in 2014, the 15% marginal tax bracket in 2015, and the 35% marginal tax bracket in 2016.

b. In 2015, Marvin, a cash basis taxpayer, took a $2,000 itemized deduction for state income taxes paid. This increased his itemized deductions to a total that was $800 more than the standard deduction. In 2015, Marvin received a $1,600 refund when he filed his 2015 state income tax return. Marvin was in the 15% marginal tax bracket in 2015, but was in the 35% marginal tax bracket in 2016.

c. In 2015, Barb, a cash basis taxpayer, was in an accident and incurred $8,000 in medical expenses, which she claimed as an itemized deduction for medical expenses. Because of the 10%-of-AGI reduction, the expense reduced her taxable income by only $3,000. In 2016, Barb successfully sued the person who caused the physical injury and collected $8,000 to reimburse her for the cost of her medical expenses. Barb was in the 15% marginal tax bracket in both 2015 and 2016.