You are a CPA with an office in NearLakes City and customers consisting primarily of professionals, small business owners and entrepreneurs. John Smith, Esq., a practicing attorney with offices near yours, walks in your office and wants suggestion from you relating to a recent influx of cash he received as a result of winning a large jury verdict on behalf of his client in an own injury case. His wife Jane Smith accompanies him during your meeting because she has some extra tax planning advice to ask of you.
Role
After reviewing John and Jane Smith's points of view, it can be your turn as a tax professional to decide on best course of action from a tax perspective on their issues. Create a three page memo to John and Jane Smith addressing the issues presented.
1. John Smith tax issues: a. Explain how is the $300,000 treated for purposes of Federal tax income?
b. Describe how is the $25,000 treated for purposes of Federal tax income?
c. Explain what is your determination regarding reducing the taxable amount of income for both (a) and (b) above?
2. Jane Smith tax issues: a. Explain what are the different tax consequences between paying down the mortgage (debt) and assuming a new mortgage (debt) for Federal income tax purposes?
b. Will John and Jane Smith utilize a 1031 tax exchange to buy a more expensive house using additional money from John's case?
c. Does Jane have a business or hobby and why is distinction important?
d. Would Jane realize better tax benefits if she had a separate business for her jewelry making activities?
e. Evaluate what tax benefits would John realize if he invested $15,000 in Jane's jewelry making?
f. Will Jane depreciate her vehicle or jewelry making equipment? How?
3. John and Jane Smith tax issue: a. Could John and Jane file separate tax returns or jointly?