1a). How is the $300,000 treated for purposes of federal income tax?
The $300,000 that John Smith received would be treated as income. According to the IRS, income is classified as “earned income includes all the taxable income and wages you get from working,” such as: •wages, salaries, tips, and other taxable employee pay;
•union strike benefits;
•long-term disability benefits received prior to minimum retirement age; •net earnings from self-employment, such as own or operate a business; and •gross income received as statutory employee.
John Smith will be taxed on his income of $300,000 regardless if he received the amount as a lump sum or in annuity. The constructive receipt doctrine states that “… taxpayer is liable for income, which has not been physically received, but has been credited to the taxpayer’s account or otherwise becomes available for him or her to draw upon in the future.” Sources:
1b). How is the $25,000 treated for purposes of federal income tax?
The $25,000 is an out of pocket expense for business use within those 2 years that the case was ongoing. It will not be taxed on and it will help to lower John’s adjusted gross income for the tax year, but depending if John has claim it as part of his deductions yet or not. 1c). What is your determination regarding reducing the taxable amount of income for both (a) and (b) above?
In order to reduce the taxable amount of income for both (a) and (b) John would be better off in taking his $300,000 in annuity payments, rather than one lump sum. It will help John to lower his tax rate because his adjusted gross income is lower.
1d). Is it more beneficial to continue leasing the business space or to buy the building?
In order to determine if it is more beneficial to continue leasing the business space or to buy the building,...