Hobby vs Business

In: Business and Management

Submitted By wtaylor
Words 651
Pages 3
John Smith tax issues:
a. How is the $300,000 treated for purposes of Federal tax income?
With most lawyers who handle personal injury case, they work on a contingent-fee arrangement. If the jury awards the client the settlement, then the settlement is taxed to the client not the lawyer. This type of arrangement has been put through the Tax Court which has ruled that the client is the one controlling the decision to either accept the settlement or reject it thus the settlement is income to the client and not the lawyer. (http://www.irs.gov/pub/irs-irbs/irb05-15.pdf) I do not know the proper way to treat this amount of money. According to the articles I have read, it is not income but other articles say it is. I have been looking the entire website and am more confuse now than when I started.
b. How is the $25,000 treated for purposes of Federal tax income?
The $25,000 that were for expenses will have to be claimed on the tax return as income since they were previous deducted as a business expense and are now be recovered.
c. What is your determination regarding reducing the taxable amount of income for both (a) and (b) above?
I have no idea on how to reduce this income.

2. Jane Smith tax issues:
a. What are the different tax consequences between paying down the mortgage (debt) and assuming a new mortgage (debt) for Federal income tax purposes?
The tax consequences for the above question are as follows: if the mortgage is paid off there is no deduction for the mortgage interest on the individual tax return and it would take a while before the interest was of an amount that would help on the itemized deduction if a new mortgage was assumed. There also maybe penalties for paying the mortgage off early.
b. Can John and Jane Smith utilize a 1031 tax exchange to buy a more expensive house using additional money from John’s case?
No, they cannot use…...

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