In 2011,Godfrey received a $50,000 sales commission on a long-term contract.But in 2012,the customer filed bankruptcy and Godfrey's employer was not able to collect from the customer.Under the bonus agreement,Godfrey was required to repay the employer $20,000 of the bonus.Godfrey was in the 35% marginal tax bracket in 2011 but he is in the 25% marginal tax bracket in 2012.

Question

Quizplus · Accepted Answer

Since Godfrey was required to repay $20,000 of the bonus in 2012, he can reduce his 2012 tax liability by the amount of his tax bracket in 2011 (35%) multiplied by the amount repaid ($20,000). Therefore, his tax savings will be 35% * $20,000 = $7,000. He cannot amend his 2011 tax return, as he received the income that year, and he cannot deduct the repayment in 2012 as the income was already reported in 2011.

In 2011,Godfrey Received a $50,000 Sales Commission on a Long-Term