Tax Issues/Ethics Letter Assume a relative asks for your tax advice (after all, you told them to "just ask!"), or assume you are responding to a client as you write a letter on one of the following cases. For each case, identify the tax issues, which issues may be ethical issues, what advice you would give the taxpayer, and measure the tax cost/savings of your advice (assume a marginal tax rate of 15%). Realize that they are looking to you for an answer, so your letter should provide an answer of what they should do with the reasoning of why and the support for your reasoning
Case 1. In March, Jim, a firefighter, was injured in the line of duty. The injury was a result of interference from a shop owner. He incurred medical expenses of $14,800 related to the injuries. The shop owner’s insurance company offered, and Jim accepted, $34,800 and acknowledged that the $20,000 above medical costs was to avoid court proceedings and a potentially higher punitive damage awards. Jim prepared and filed his income tax return for the year and included the medical expenses but did not include the insurance settlement since it came after the tax return was filed. What is the ethical issue in this case? What advice would you give Jim? What are the tax costs of his options?
Case 2. Maggie and her husband Hank own a condo in Del Mar, California. During the horse racing season, they rent their condo to wealthy Saudi’s who come to Del Mar for two weeks. Maggie and Hank receive $16,000 for the two weeks in rent and they go to Sacramento and visit relatives during the rental period; they live in the condo when not rented. This year, the renter’s asked Maggie and Hank if they could stay an additional two days because one of their children was too ill to travel. Maggie and Hank agreed but did not charge additional rent. When Maggie and Hank returned to their Del Mar condo, they found the renter’s left a wonderful fruit and flower basket with a card thanking them for their hospitality and a check for $2,000 which was in addition to the $16,000 rent already paid. In talking to Maggie and Hank, you learned that the prorated portion of mortgage interest and real estate taxes for 16 of 365 days is $1,155. Other expenses during the 16 days (utilities, maintenance, etc.) totaled $1,940, and the prorated depreciation was $1,826. Their marginal tax bracket is 25%. What is the ethical issue in this case? What options do Maggie and Hank have in reporting the rental income? What is the cost of each option? What is your advice?
Grading of Letter The letter must be in a business format, and use proper grammar, punctuation and spelling.