In December 2019, Todd, a cash basis taxpayer, paid $1,200 of fire insurance premiums for the calendar year 2020 on a building he held for rental income.Todd deducted the $1,200 of insurance premiums on his 2019 tax return.He had $150,000 of taxable income that year.On June 30, 2020, he sold the building and, as a result, received a $500 refund on his fire insurance premiums.As a result of the above:

Question

Quizplus · Accepted Answer

According to the tax benefit rule, if a taxpayer previously took a tax deduction for an expense in a prior year and later receives a refund or reduction of that expense, the taxpayer must include the amount of the refund or reduction in gross income in the year received. Therefore, Todd should include the $500 refund on his 2020 tax return as gross income. Amending his 2019 return is not necessary in this situation. Adding the $500 to his sales proceeds from the building or claiming the $500 under the claim of right doctrine are incorrect options as they do not align with the facts given in the scenario.

In December 2019, Todd, a Cash Basis Taxpayer, Paid $1,200