Tax Research Memo
Personal Injury winning treatment and other issues research
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XYZ CPAs NearLakes City
John Smith tax issues
1 a
Issue: Treatment for purposes of Federal Tax Income of $300,000 fee received out of the amount awarded by Jury.
Applicable Law: Any winnings in a personal injury lawsuit that cover the treatment of physical injuries are not taxable except for attorney fees which are taxable. IRC Sec 104(a)(2).Taxability also depends upon the place of residence of the taxpayer.
Conclusion: As per the provisions of IRC Sec 104(a) (2), $300,000 received by John Smith as fees from jury award is taxable for federal tax income purposes.
1b
Issue: Treatment for purposes of Federal Tax Income of $25,000 expenses paid upfront and received out of the amount awarded by Jury.
Applicable Law: Any winnings in a personal injury lawsuit that cover the treatment of physical injuries are not taxable except for attorney fees which are taxable. IRC Sec 104(a)(2).Any expenses can be claimed as a deduction.Taxability also depends upon the place of residence of the taxpayer.
Conclusion: Expenses paid upfront and received as part of the jury award can be claimed as a deduction in the hands of the recipient (IRC Sec 104(a) (2).
1c
Issue: Reducing the taxable amount of income for both (a) and (b) above. Applicable Law: An annuity payment in contrast to a lump sum receipt can reduce the taxation amount.
Conclusion: If there is an option to choose the form of payment i.e. an annuity or a lump sum payment, it is better to choose the option of an annuity payment as it can reduce the amount of taxation.
Jane Smith tax issues:
2a
Issue: Different tax consequences between paying down the mortgage (debt) and assuming