Problem 5-55 (LO. 3) How does the tax benefit rule apply in the following cases? a. In 2019, the Orange Furniture Store, an accrual method sole proprietorship, sold furniture on credit for $1,000 to Sammy. The cost of the furniture was $600. In 2020, Orange took a bad debt deduction for the $1,000. In 2021, Sammy inherited some money and paid Orange the $1,000 he owed. Orange's owner was in the 35% marginal tax bracket in 2019, the 12% marginal tax bracket in 2020, and the 35% marginal tax bracket in 2021. Orange Furniture must include s in gross income as the recovery of a prior deduction. The timing of the income and deductions cost Orange $ b. In 2020, Marvin, a cash basis taxpayer, took a $2,000 itemized deduction for state income taxes paid; the deduction was not limited by the SALT cap. This increased his itemized deductions to a total that was $800 more than the standard deduction. In 2021, Marvin received a $1,500 refund when he filed his 2020 state income tax return. Marvin was in the 12% marginal tax bracket in 2020 but was in the 35% marginal tax bracket in 2021. How much must Marvin include in his gross income for 2021? c. 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 the 7.5%-of-AGI reduction, 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, 12% in 2021. What amount, if any, will Barb include in her 2021 gross income?
Problem 5-55 (LO. 3) How does the tax benefit rule apply in the following cases? a. In 2019, the Orange Furniture Store, an accrual method sole proprietorship, sold furniture on credit for $1,000 to Sammy. The cost of the furniture was $600. In 2020, Orange took a bad debt deduction for the $1,000. In 2021, Sammy inherited some money and paid Orange the $1,000 he owed. Orange's owner was in the 35% marginal tax bracket in 2019, the 12% marginal tax bracket in 2020, and the 35% marginal tax bracket in 2021. Orange Furniture must include s in gross income as the recovery of a prior deduction. The timing of the income and deductions cost Orange $ b. In 2020, Marvin, a cash basis taxpayer, took a $2,000 itemized deduction for state income taxes paid; the deduction was not limited by the SALT cap. This increased his itemized deductions to a total that was $800 more than the standard deduction. In 2021, Marvin received a $1,500 refund when he filed his 2020 state income tax return. Marvin was in the 12% marginal tax bracket in 2020 but was in the 35% marginal tax bracket in 2021. How much must Marvin include in his gross income for 2021? c. 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 the 7.5%-of-AGI reduction, 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, 12% in 2021. What amount, if any, will Barb include in her 2021 gross income?
Chapter5: Gross Income: Exclusions
Section: Chapter Questions
Problem 55P
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Transcribed Image Text:Problem 5-55 (LO. 3)
How does the tax benefit rule apply in the following cases?
a. In 2019, the Orange Furniture Store, an accrual method sole proprietorship, sold furniture on credit for $1,000 to Sammy. The cost of
the furniture was $600. In 2020, Orange took a bad debt deduction for the $1,000. In 2021, Sammy inherited some money and paid
Orange the $1,000 he owed. Orange's owner was in the 35% marginal tax bracket in 2019, the 12% marginal tax bracket in 2020, and the
35% marginal tax bracket in 2021.
Orange Furniture must include
in gross income as the recovery of a prior deduction. The timing of the income and
deductions cost Orange $
b. In 2020, Marvin, a cash basis taxpayer, took a $2,000 itemized deduction for state income taxes paid; the deduction was not limited by
the SALT cap. This increased his itemized deductions to a total that was $800 more than the standard deduction. In 2021, Marvin received
a $1,500 refund when he filed his 2020 state income tax return. Marvin was in the 12% marginal tax bracket in 2020 but was in the 35%
marginal tax bracket in 2021. How much must Marvin include in his gross income for 2021?
c. 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 the 7.5%-of-AGI reduction, 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, 12% in 2021. What amount, if any, will Barb include in her 2021 gross
income?
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