MEMORANDUM

TO: John and Jane Smith
FROM:
DATE: 11/20/2011
RE: Tax Issue |

John Smith Tax Issues In regards to the $300,000 earnings from the court case this should be treated as gross income. Since the $300,000 compensates for services, including fees the earning must be classified as gross income (Cornell University Law School, 2011). The $25,000 is compensation from the expenses paid at the beginning of the trial and can be treated as an adjusted gross income and can be deducted from income. My decision regarding reducing the taxable amount of income would to either make business purchases in order to create expense upon his law office or set up retirement plans in order to adjust gross income. Under certain retirement contributions they are not taxed only the distribution and can have penalties if withdrawn early. The amount allowable as a deduction under subsection to any individual for any taxable year cannot exceed the lesser of the deductible amount, or an amount equal to the compensation includible in the individual’s gross income for the taxable year. (Cornell University Law School, 2011). I would recommend purchasing the office space instead of leasing in order to create more expenses in order to have more deductions at the end of the year in order to not be taxed on the entire $300,000.
Jane Smith's Tax Issues The different tax consequences between paying down the mortgage and assuming a new mortgage for federal income tax purpose would be that you would lose out on a deduction for paying the interest on the home mortgage. There isn't any tax consequences for assuming a new mortgage. John and Jane Smith cannot use a 1031. A 1031 would only be viable for a business property not personal property such as John and Jane's primary or secondary resident. No gain or loss shall be recognized on the exchange of property held for