In 2017, Aurora received a $25,000 bonus computed as a percentage of profits. In 2018, Aurora’s employer determined that the 2017 profits had been incorrectly computed, and Aurora had to refund the $8,000 in 2018. Assume that Aurora was in the 35% tax bracket in 2017 but in the 15% bracket in 2018.
a. In 2017, how much is Aurora required to include in income?
b. In 2018, what is the amount of the deduction Aurora can claim? What is the reduction in taxes for 2018 as a result of the deduction?