You Decide Essay

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Prepare a three-page memo (at least 900-1,500 words per page) to John and Jane Smith addressing the issues presented: 1. John Smith tax issues: a. How is the $300,000 treated for purposes of federal tax income? b. How is the $25,000 treated for purposes of federal tax income? c. What is your determination regarding reducing the taxable amount of income for both (a) and (b) above? d. Is it more beneficial to continue leasing the business space or to buy the building? 2. Jane Smith tax issues: e. What are the different tax consequences between paying down the mortgage (debt) and assuming a new mortgage (debt) for federal income tax purposes? f. Can John and Jane Smith utilize a 1031 tax exchange to buy a more expensive house using additional money from John's case? g. Does Jane have a business or hobby? Why is this distinction important? h. Would Jane (and John) realize better tax benefits if she had a separate business for her jewelry-making activities? i. What tax benefits would John realize if he invested $15,000 in Jane's jewelry making? j. Can Jane depreciate her vehicle or jewelry-making equipment? How? 3. John and Jane Smith tax issue: k. Should John and Jane file separate or joint tax returns? Memo To: John & Jane Smith From: Date: 12/2/2014 Re: Summary of various tax issues Your first question is how is the $300,000 treated for purposes of federal tax income? In Code 61(a), income derived from services is one of the listed forms of taxable income. This includes fees, commissions, fringe benefits and similar items. Since the compensation was earned this year, even though you worked on the case for two years, you will include it as ordinary income this year. You can reduce your tax liability by deducting necessary business expenses that were paid in the same

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