How does the tax benefit rule apply in the following cases?
a. In 2012, 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 2013, Orange took a bad debt deduction for the $1,000 because Sammy would not pay his bill.
In 2014, Sammy inherited some money and paid Orange the $1,000 he owed. Orange was in the 35% marginal tax bracket in 2012, the 15% marginal tax bracket in 2013, and the 35% marginal tax bracket in 2014.
b. In 2013, 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 2014, 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 2013 and 2014.

  • CreatedMay 25, 2015
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