Ted,a cash basis taxpayer,received a $150,000 bonus in 2015 when he was in the 35% marginal tax bracket.In 2016,when Ted was in the 28% 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 2016 tax liability by $14,000 (.35 × $40,000).

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Since Ted is a cash basis taxpayer, the refund amount of $40,000 will be treated as a deductible expense in the year it was paid (2016). This will reduce Ted's taxable income by $40,000, and since he was in the 28% marginal tax bracket in 2016, his tax liability will be reduced by $14,000 (0.28 x $40,000).

Ted,a Cash Basis Taxpayer,received a $150,000 Bonus in 2015 When