Week 4 You Decide
Memo
To: John and Jane Smith
From:
Date: 10/12/14
Re: Memo summarizing various tax issues
1. John Smith's Tax Issues
Issue (a): How is the $300,000 treated for purposes of federal tax income?
John Smith is an attorney who received $300,000 for winning a personal injury court case for a client. The $300,000 should be reported as gross income when he files his tax return for the year that the $300,000 was received.
Applicable Law and Analysis
The applicable tax law is Title 26 U.S. Code 61 which defines gross income as “all income from whatever source derived, including compensation for services”. (http://www.law.cornell.edu/uscode/text/26/61).
Conclusion
The $300,000 is to be treated as gross income which is subject to income tax.
Issue (b): How is the $25,000 treated for purposes of federal tax income?
John Smith also received reimbursement for $25,000 worth of expenses he previously paid as incurred during the trial. The $25,000 should not be included in gross income when he files his tax return for the year that the $25,000 was received.
Applicable Law and Analysis
The applicable tax law is Title 26 U.S. Code 162 which advises that “there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business”. (http://www.law.cornell.edu/uscode/text/26/162).
Conclusion
The $25,000 is an allowable business expense deduction and will not be included in gross income.
Issue (c): What is your determination regarding reducing the taxable amount of income for both (a) and (b) above?
John Smith will be required to pay income tax on the $300,000 only. He should consider itemizing his deductions instead of taking the standard deduction which might provide a larger reduction in income. In addition, John Smith might want to consider choosing to receive his $300,000 in annuity payments instead of a lump sum. If the annuity payments are spread out
To: John and Jane Smith
From:
Date: 10/12/14
Re: Memo summarizing various tax issues
1. John Smith's Tax Issues
Issue (a): How is the $300,000 treated for purposes of federal tax income?
John Smith is an attorney who received $300,000 for winning a personal injury court case for a client. The $300,000 should be reported as gross income when he files his tax return for the year that the $300,000 was received.
Applicable Law and Analysis
The applicable tax law is Title 26 U.S. Code 61 which defines gross income as “all income from whatever source derived, including compensation for services”. (http://www.law.cornell.edu/uscode/text/26/61).
Conclusion
The $300,000 is to be treated as gross income which is subject to income tax.
Issue (b): How is the $25,000 treated for purposes of federal tax income?
John Smith also received reimbursement for $25,000 worth of expenses he previously paid as incurred during the trial. The $25,000 should not be included in gross income when he files his tax return for the year that the $25,000 was received.
Applicable Law and Analysis
The applicable tax law is Title 26 U.S. Code 162 which advises that “there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business”. (http://www.law.cornell.edu/uscode/text/26/162).
Conclusion
The $25,000 is an allowable business expense deduction and will not be included in gross income.
Issue (c): What is your determination regarding reducing the taxable amount of income for both (a) and (b) above?
John Smith will be required to pay income tax on the $300,000 only. He should consider itemizing his deductions instead of taking the standard deduction which might provide a larger reduction in income. In addition, John Smith might want to consider choosing to receive his $300,000 in annuity payments instead of a lump sum. If the annuity payments are spread out