Essay about Accounting: John Smith Tax Issue

944 WordsFeb 3, 20134 Pages
John Smith tax issue: 1a). How is the $300,000 treated for purposes of federal income tax? The $300,000 that John Smith received would be treated as income. According to the IRS, income is classified as “earned income includes all the taxable income and wages you get from working,” such as: • wages, salaries, tips, and other taxable employee pay; • union strike benefits; • long-term disability benefits received prior to minimum retirement age; • net earnings from self-employment, such as own or operate a business; and • gross income received as statutory employee. John Smith will be taxed on his income of $300,000 regardless if he received the amount as a lump sum or in annuity. The constructive receipt doctrine states that “……show more content…
John will also have to measure his interest expense and compare it to buying or leasing. If John goes with leasing the business building he can still claim deductions for his rent. However, if John purchased the building for his business he would be able to claim interest as part of his deductions as well as any maintenance costs, taxes, and depreciation. It may be in the best interest of John to continue leasing the business space. Jane Smith tax issues: 2a). What are the difference tax consequences between paying down the mortgage (debt) and assuming a new mortgage (debt) for federal income tax purposes? If Jane and John Smith were refinanced their home, they wouldn’t be able to claim the entire amount of their refinance as a deduction. In other words, they would lose tax deduction on their loan when their mortgage is paid in full. On the other hand, if Jane and John Smith were to hold onto their mortgage and not pay it off they would be able to receive certain tax deductions for it. For example, their mortgage interest is a part of tax deduction that they can claim every year. The couple will have to analyze every advantages and disadvantages to paying down the mortgage and assuming a new mortgage before being able to take further action. 2b). Can John and Jane Smith utilize a 1031 tax exchange to buy a more expensive house using additional money from John’s case? Being able to invest in a new home is a great investment and tax savings purposes for John

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