Memo To: John and Jane Smith From: Desiree Looft, CPA Date: September 24, 2011 Subject: Explanation of tax benefits and liabilities for business and personal. 1(a) As a result of a recent court settlement for a client John earned $300,000 for his law practice LLC. He wants to minimize his tax liability and understand how the IRS will treat this money earned. He lease’s office space for $3,500 per month. He wants to know the advantages in leasing office space versus purchasing the building. John has income derived from a business and as such the gross income will be taxable. (Code §1.61-3(a)) This total amount of taxable income will pass through to his personal taxes since he has an LLC, meaning he will be subject to self …show more content…
(Code §219(c )) With the lease payment and the IRA’s John will have deductions of $52,000 against the $300,000 and an additional deduction of paying half of the self employment tax. () 2(a) Jane inquired concerning what the tax treatment difference if any there is in paying down a mortgage and assuming a new mortgage in terms of federal taxes. Married taxpayers may exclude up to $500,000 of gain upon the sale of their residence every two years. (Code § 121(b)(1) and (2), (Code §121(b)(3)(B)). The requirement is they need to have owned and occupied the residence as their principal residence for two out of the last five years prior to the sale. (Code §121(b)(3)(A)) Assuming a new mortgage will most likely give them a larger deduction of mortgage interest if they have lived in their current home for a while that is otherwise nondeductible. (Code § 163(h)(3)(E)(i). In summary the only tax advantage is the ability to have a larger deduction of mortgage interest on the new home. (Code § 163(h)(3)(E)(i). With the sale of their current home they would be able to exclude the gain from the sale up to $500,000. (Code §121(b)(1) and (2)) A word of caution if the sale of their new home the gain is more than $500,000 they would have to pay tax on the amount over at a rate of 25%. 2(b) Jane has inquired about the 1031 tax exchange if they could use that plus some of John’s money from the case to purchase a more expensive house. The words “like-kind” are
taxes based on D.C. income tax laws or paid income tax on his California home and not for the
* What are the differences between the following components of taxable income? Provide at least one example of each.
Issue b) Can John and Jane Smith utilize a 1031 tax exchange to buy a more expensive house using additional money from John's case?
c. The Johnsons own a piece of investment real estate. They paid $500 of real property taxes on the property and they incurred $200 of expenses in travel costs to see the property and to evaluate other similar potential investment properties.
John and Jane own and rent out a duplex in Atlanta. They are getting older now and are planning to retire and to move to Miami. John and Jane would like to sell the Atlanta Duplex and purchase a small commercial building next to the lovely condo they bought on the beach. The main issue is John and Jane can only afford to buy this building if they are able to capture all of the existing equity in their Atlanta duplex. To avoid (defer) a taxable event when they sell their duplex John and Jane can utilize Section 1031 of the IRC. There are, however, a few hoops that John and Jane must jump through to qualify.
3. Allen visits Reno, Nevada, once a year to gamble. This year his gambling loss was $25,000. He commented to you, “At least I didn’t have to pay for my airfare and hotel room. The casino paid that because I am such a good customer. That was worth at least $3,000. “What are the relevant tax issues for Allen?
Generally, a realized gain from sale of personal residence can be excluded from gross income under Exclusion 121. The amount realized is the selling price of the property less any disposition costs. The adjusted basis is then determined and the amount is subtracted from the realized sum. This will give you the amount of loss or gain from the sale of the property. Since the couple occupied the sold home for at least 2 of the last 5 years they fulfill the requirements for exclusion 121 treatment. The exclusion amount for the couple if filing jointly is $500.000 and the calculation would be as follows:
4) Explain the differences between statutory and ordinary income. Give examples of either category in your answer.
b. Can John and Jane Smith utilize a 1031 tax exchange to buy a more expensive house using
1(a). As a result of a recent court settlement for a client John earned $300,000 for his law practice LLC. He wants to minimize his tax liability and understand how the IRS will treat this money earned. He lease’s office space for $3,500 per month. He wants to know the advantages in leasing office space versus purchasing the building.
4. In any judicial proceeding involving proposed assessment of income tax, does the IRS or the taxpayer carry the burden of proof?
2. Which two statements describe how taxes influence decisions made when filing a return for an individual taxpayer?
2b) Can John and Jane Smith utilize a 1031 tax exchange to buy a more expensive house using additional money from John’s case?
“When you rent, you write your monthly check and that money is gone forever. But when you own your home, you can deduct the cost of your mortgage loan interest from federal income taxes, and usually from your state taxes” (Home Buyers Guide, p4). Buying a home can be alarming, if you are not prepared, whether for the first time or even for the fifth time. If you take time before going into the process to gain the knowledge needed, one might see that
. (TCO 2) Barry owns a 30% interest in a partnership that earned $300,000 this year. He also owns 30% of the stock in a C corporation that earned $300,000 during the year. The partnership did not make any distributions, and the corporation did not pay any dividends. How much income must Barry report from these businesses? (Points : 2)