Week 4 - You Decide

MEMORANDUM

To: John Smith Esq. and Jane Smith

Date: February 3, 2013

Re: Tax Planning Consult

Dear John and Jane Smith,

I have reviewed the matter of your tax planning previously discussed and have come with some tax strategies in order to help you plan for the new tax year. Since you have different concerns in regard to how to move forward, I will address each of you separately.

First of all John:

1a.) The $300,000 fee that you received for your services as an attorney from your client is considered gross income according to IRC section 61, which states that “Gross income is derived from whatever sources, including (but not limited to) compensation for services, including fees, commissions, fringe benefits, and similar terms.” The $300,000 falls under this category, therefore it is taxable after calculating adjusted gross income by subtracting all deductions (itemized or standards) applied from the gross income. According to the 16th Amendment of the United States Constitution, the government can tax any income that falls under gross income (Smith, 2013). You would not be able to use the accrual method of accounting for the previous year since you did not know the amount of the settlement before receiving the $300,000

1b.) The $25,000 is not considered gross income but is classified as a business expense since it was spent for the benefit of the case instead of personal expenditures. Under IRC Section 162, taxpayers are allowed tax deductions for all ordinary and necessary expenses paid during a tax year in carrying a trade or business (Smith, 2013). Section 162 also requires that the expenses occur during the taxable year and spanned a 2 year period; they also must be appropriately allocated. If the expenses were paid in the previous year, they should have been deducted that year. If there were expenses paid in the current year, they should be expensed in the current year.

1c.) You wanted to know how to reduce your taxable income for the...