1. John Smith tax issues:

a. How is the $300,000 treated for purposes of Federal tax income?
In this question, the 300,000 would be considered self-employed income, however, just like any other income it can be taxed through the following purposes self-employment (this is your business), federal and last also state taxes. Not every state however does have state taxes so it depends on the state that you are currently living in. When doing taxes you should go to the attorney’s 1040 and enter this information in Schedule C.
b. How is the $25,000 treated for purposes of Federal tax income?

Have you expensed for the 25,000 when you were paid the 300,000 fee. If you did then this amount would also be considered income, but not net income for tax purposes only. Just as the 300,000 the 25,000 should also be included in Schedule C.
c. What is your determination regarding reducing the taxable amount of income for both (a) and (b) above?
It is in John’s best interest to minimize the taxes on his income. In order to that he will have to have revenues to offset any or all expenses he has incurred on his 1040. Some examples is to possible set up retirement plans like IRA’s; paying off as many expenses as he is able to or buying equipment to use as a write off (review section 179) this can help by turning it into a deduction.
2. Jane Smith 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?
Having a mortgage gives you a mortgage interest paid deduction, which you would lose if you decided to pay down the mortgage. By reviewing Publication 936 and 523 in regards to selling your home and the mortgage interest deduction it is my understanding that you would just have to clarify what the interest rate would be between both houses. If your amount is over