Question

In 2018, the Orange Furniture Store, an accrual method sole proprietorship, sold furniture on credit for $1,000 to Sammy. The cost of the furniture was $600. In 2019, Orange took a bad debt deduction for the $1,000. In 2020, Sammy inherited some money and paid Orange the $1,000 he owed. Orange's owner was in the 35% marginal tax bracket in 2018, the 12% marginal tax bracket in 2019, and the 35% marginal tax bracket in 2020. Orange Furniture must include $fill in the blank 4bc14b03ef8bfd3_1 in gross income as the recovery of a prior deduction. The timing of the income and deductions cost Orange $fill in the blank 4bc14b03ef8bfd3_2 . b. In 2019, Marvin, a cash basis taxpayer, took a $2,000 itemized deduction for state income taxes paid; the deduction was not limited by the SALT cap. This increased his itemized deductions to a total that was $800 more than the standard deduction. In 2020, Marvin received a $1,500 refund when he filed his 2019 state income tax return. Marvin was in the 12% marginal tax bracket in 2019 but was in the 35% marginal tax bracket in 2020. How much must Marvin include in his gross income for 2020

Answer 1

1a. $230

1b. $800

Step-by-step explanation:

Calculation to determine The timing of the income and deductions cost Orange

Using this formula

Timing of the income and deductions cost Orange=(Marginal tax bracket in 2018-Marginal tax bracket in 2019)×Gross income

Let plug in the formula

Timing of the income and deductions cost Orange= (0.35 − 0.12) × $1,000

Timing of the income and deductions cost Orange=0.23×$1,000

Timing of the income and deductions cost Orange= $230

Therefore the Timing of the income and deductions cost Orange will be $230

1b. Calculation to determine How much must Marvin include in his gross income for 2020

Based on the information given the amount that Marvin must include in his GROSS INCOME for the year 2020 is the refund amount of $800 which represent the amount we were told increased his itemized deductions reason been that a tax benefit amount was received for the deduction in the year 2019 while on the other hand the refund amount of $700 that was remaining which is calculated as ($1,500-$800) will not be included in Marvin GROSS INCOME reason been that it does not have any tax benefit.

Therefore The Amount that Marvin must include in his gross income for 2020 is $800