Taxation in the United States: Case Study

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John Smith I worked on this case for over two years. The jury awarded my client $2,000,000 in damages, of which my fee was $300,000 plus recovery of expenses paid up front in the amount of $25,000. How is the $300,000 taxed? What about the $25,000? What can I do to minimize the tax consequences of each? Also, I am thinking about buying the building that I currently lease my office space in. My current lease is $3,500 per month. How is this lease reported on my income tax returns (either personally or for my business which is a separate law practice established as an LLC)? Do I get better tax benefits for paying the lease or for buying the building? What are the differences? Jane Smith I think that the fees would be better used for…show more content…
How is the $25,000 treated for purposes of Federal tax income? John received, in addition to the $300,000, $25,000 for expenses he incurred during the trial. I would assume that the incurred expenses were deducted and when he was paid the $25,000 it would be considered a reimbursement and it would not be considered income. John paid these expenses out of his pocket and was merely reimbursed for what he spent on the case. c. What is your determination regarding reducing the taxable amount of income for both (a) and (b) above? John would like to reduce his taxable income. One way to do so is to take advantage of itemized deductions. Itemized deductions include expenses for health care, state and local taxes, personal property taxes (such as car registration fees), mortgage interest, gifts to charity, job-related expenses, tax preparation fees, and investment-related expenses. ( Another way to reduce his taxable income is to form an LLC. According to IRS “an LLC is... John
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