You Decide - Jane and John Smith Tax Advice Essay

1509 Words Feb 14th, 2013 7 Pages
AC553 – You Decide 1. John Tax Issues:

a. How is the $300,000 treated for purposes of Federal tax income?

The $300,000 is included in John’s Gross Income. Section 61 of the IRS Tax code generally defines gross income as all income from whatever source derived, including the compensation for services, fees, commissions, fringe benefits and similar items. Therefore the $300,000 is classified as compensation John received for legal services rendered.

b. How is the $25,000 treated for purposes of Federal tax income?

The $25,000 should also be included in gross income, as they are also included in the fees for the legal services) provided.

c. What is your determination regarding reducing the taxable amount of
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Business interest, the amount charged for the use of money borrowed for business activities can also be written off. John can also deduct various federal, state , local and foreign taxes directly attributable to the business as expenses.

John can also significantly decrease their income tax exposure, by regularly contributions to a retirement or 401k plan for himself . Different retirement plans have different restrictions, but they generally decrease one’s tax liability.

In the determination of reducing the taxable income regarding the upfront payment of $25,000, John could write off this amount of the recovery expenses as business expenses deductible, although the amount was received two years ago. The amount can be deductible as prepayments, as the amount was consumed by the close of the following year, and there probably was a business purpose for prepaying the expenditure.

John can also treat the $25,000 as a production of income expenses, which are deductible as miscellaneous itemized deductions for adjusted gross income on Schedule E. Code Section 62 (a) (4

2. Jane Tax Issues a. What are the different tax consequences between paying down the mortgage (debt and assuming a new mortgage (debt ) for Federal income tax purposes? Tax consequences of paying down the mortgage. For Federal income tax purposes, it is not advisable for Jane and John

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