Ted, a cash basis taxpayer, received a $150,000 bonus in 2019 when he was in the 35% marginal tax bracket.In 2020, when Ted was in the 24% marginal tax bracket, it was discovered that the bonus was incorrectly computed, and Ted was required to refund $40,000 to his employer.As a result of the refund, Ted can reduce his 2020 tax liability by
$14,000 (.35 × $40,000).

Question

Quizplus · Accepted Answer

Since Ted is a cash basis taxpayer, he will receive a deduction for the $40,000 refund in the year that he pays it. Since he is in the 24% marginal tax bracket in 2020, his tax savings will be $9,600 ($40,000 × 0.24). However, he will also have to pay back the $14,000 tax benefit he received in 2019, resulting in a net tax savings of $5,400 ($9,600 - $14,000).

Ted, a Cash Basis Taxpayer, Received a $150,000 Bonus in 2019