Your Friend Scotty Informs You That He Received a "Tax-Free

question 106

Multiple Choice

Your friend Scotty informs you that he received a "tax-free" reimbursement in 2017 of some medical expenses he paid in 2016. Which of the following statements best explains why Scotty is not required to report the reimbursement in gross income?

• A)Scotty itemized deductions in 2016.
• B)Scotty did not itemize deductions in 2016.
• C)Scotty itemized deductions in 2017.
• D)Scotty did not itemize deductions in 2017.
• E)Scotty itemized deductions in 2017 but not in 2016.

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Definitions:

Essential Goods

Products that are necessary for basic living and well-being, often unchanged by changes in income.

Nonessential Goods

Products and services considered as non-critical for survival or basic living standards.

Substitution Effect

The change in consumption patterns due to a change in the relative prices of goods, leading consumers to replace more expensive items with cheaper ones.

Relative Price

Relative Price is the price of one good or service compared to another, usually reflecting its value in terms of another item rather than its absolute price in currency.