Acct 553

You Decide

John Smith tax issues:
a. How is the $300,000 treated for purposes of federal tax income? The $300,000 is taxable income; the reason is that the IRS always collects taxes when we receive a lump sum payment as compensation for negligence, injury or other wrongdoing. Litigants are allowed to bring up a taxation lawsuit in the case of lump sum payments.
John, you will have to that the amount is paid to the government on time so that no fines or penalties are charged due to late payment. Or automatically withhold 20 percent of a lump-sum distribution to pay federal taxes owed by the recipient of the disbursement. The Internal Revenue Service determines the exact amount of tax a person owes on a lump-sum distribution based on several factors. If you fail to make the payment of taxes to the IRS for any lump sum payment, such as this one, the law says that you would not only have to pay the taxes back to the IRS, but you would also have to assume the late payment penalty to the government.
b. How is the $25,000 treated for purposes of federal tax income?
This situation of the $25,000, they are not taxable; it should be treated as expenses, meaning that they can be deducted as expenses for that year. Since profits equal revenues minus expenses, claiming expenses reduces the amount of your taxable profit. You can deduct these expenses from your taxable income.

c. What is your determination regarding reducing the taxable amount of income for both (a) and (b) above? John should choose the annuity payments options, in order to reduce the chances of lawsuit taxation in the case of the large settlement for the $300,000. The $25,000, as stated pervious, it need to be treated as expenses and deducted from his income tax. He can file an amendment to his previous tax year to change to use the accrual method. With this method, he can split