Question

a. Briefly explain the tax benefit rule.

A.

A family can reduce its taxes by shifting income from family members who are in high tax brackets to family members who are in low tax brackets. For​ example, children may own stock in the family business. Dividends on the stock are taxed to the children.

B.

A taxpayer who is the recipient of a disputed amount must include the amount received in gross income as long as the use of the funds is unrestricted.

C.

A taxpayer who recovers an amount deducted in a previous year must report as gross income the recovered amount. The recovered amount need not be included in gross income if the taxpayer received no tax benefit from the previous deduction. There is a tax benefit only if the deduction reduced the tax in the previous year.

D.

A taxpayer who recovers an amount deducted in a previous year must report as gross income the recovered amount. The recovered amount must be included in gross income even if the taxpayer received no tax benefit from the previous deduction.

b. Is a taxpayer required to report the reimbursement of a medical expense by insurance as income if the reimbursement is received in the year following the year of the​ expenditure?

A.

The reimbursement of a medical expense by insurance would be taxable only if the taxpayer had previously deducted the expense and it resulted in tax savings. There would have been no tax benefit if either the taxpayer had claimed the standard​ deduction, or if the floor for the medical deduction exceeded the medical expenses.

B.

The reimbursement of a medical expense by insurance would never be taxable. Since the taxpayer is receiving a reimbursement of medical​ expenses, it cannot be considered income or taxable by the IRS.

C.

The reimbursement of a medical expense by insurance would be taxable even if the taxpayer did not deduct the expense in the previous year. The reimbursement of the medical expense is considered income to the taxpayer.

D.

The reimbursement of a medical expense by insurance would be taxable only if the reimbursement is received three or more years after the taxpayer previously deducted the expense and it resulted in tax savings. There would have been no tax benefit if either the taxpayer had claimed the standard​ deduction, or if the floor for the medical deduction exceeded the medical expenses.

Answer 1

a. Tax benefit rule

Answer: Option C.

A taxpayer who recovers an amount deducted in a previous year must report as gross income the recovered amount. The recovered amount need not be included in gross income if the taxpayer received no tax benefit from the previous deduction. There is a tax benefit only if the deduction reduced the tax in the previous year.

b. Reimbursement of medical expense by insurance

Answer: Option A.

The reimbursement of a medical expense by insurance would be taxable only if the taxpayer had previously deducted the expense and it resulted in tax savings. There would have been no tax benefit if either the taxpayer had claimed the standard​ deduction, or if the floor for the medical deduction exceeded the medical expenses.