Response to the following questions:
1. Tax Benefit Rule
Explain the tax benefit rule as it applies to refunds of state and local income taxes, as well as federal income taxes.
2. Tax Benefit Rule
In 2013, Lou, age 35 and single, deducted $5,325 on his federal income tax return for state income taxes withheld during the year. Lou has excellent vision. In 2014, Lou received an $875 refund from the state. For 2013, Lou deducted $11,504 in itemized deductions. After these deductions, Lou's taxable income was $100,000. The 2013 standard deduction for a single taxpayer was $6,100. How much of the refund must Lou include in his 2014 gross income?