Ted,a cash basis taxpayer,received a $150,000 bonus in 2011 when he was in the 35% marginal tax bracket.In 2012,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 2012 tax liability by $14,000 (.35 ´ $40,000).

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Since Ted is a cash basis taxpayer, the bonus income was included in his 2011 income and taxed at the 35% marginal tax bracket. However, when he had to refund a portion of the bonus in 2012, he could use the refund to reduce his taxable income for that year and therefore reduce his tax liability. The reduction in tax liability would be equal to his marginal tax rate in the year of the refund, which was 28%. Therefore, Ted can reduce his 2012 tax liability by $14,000 (.28 x $40,000).

Ted,a Cash Basis Taxpayer,received a $150,000 Bonus in 2011 When