33. LO.9 How does the tax benefit rule apply in the following cases?

a. In 2019, the Orange Furniture Store, an accrual method taxpayer, sold furniture on credit for $1,000 to Sammy. Orange’s cost of the furniture was $600.

In 2020, Orange took a bad debt deduction for the $1,000 because Sammy would not pay his bill.

In 2021, Sammy inherited some money and paid Orange the $1,000 he owed.

Orange was in the 35% marginal tax bracket in 2019, the 12% marginal tax bracket in 2020, and the 35% marginal tax bracket in 2021.

b. In 2020, 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 a limitation, though, the expense reduced her taxable income by only $3,000. In 2021, 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 22% marginal tax bracket in 2020 and in the 12% bracket in 2021.