LO.3 How does the tax benefit rule apply in the following cases?

a. In 2010, 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 2011, Orange took a bad debt deduction for the $1,000. In 2012, Sammy inherited some money and paid Orange the $1,000 he owed. Orange was in the 35% marginal tax bracket in 2010, the 15% marginal tax bracket in 2011, and the 35% marginal tax bracket in 2012.

b. In 2011, 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 2012, Marvin received a $1,600 refund when he filed his 2011 state income tax return. Marvin was in the 15% marginal tax bracket in 2011, but was in the 35% marginal tax bracket in 2012.

c. In 2011, 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 2012, 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 2011 and 2012.