You Decide - MEMORANDUM To: John and Jane Smith From: Tanya...

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MEMORANDUM To: John and Jane Smith From: Tanya Byington Date: March 23, 2012 RE: Tax Planning The purpose of this memorandum is to give tax advice to the Smith family and to specifically address their concerns for the year which they raised during the interview conducted on 3/23/12, in which several key questions were brought up. Each person's individual concerns will be covered in personalized sections and a separate section will address the question to how the couple should file for the year. This information is solely for the 2012 tax year, and my responsibilities will not include any preparation of other additional tax return that is not covered in our scope for the 2012 tax year. After I complete my engagement based on the information given to me by you, I will deliver a complete return to you. Then it will be your sole responsibility to file the returns with the appropriate taxing authority. FOR JOHN SMITH: 1. John raised three specific questions. How is the $300,000 treated for tax purposes? How is the $25,000 treated for tax purposes? What is your determination regarding reducing the taxable amounts listed above? Response: Issue : Treatment for purposes of Federal Tax Income of $300,000 fee received out of the amount awarded by Jury.
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Applicable Law: Any winnings in a personal injury lawsuit that cover the treatment of physical injuries are not taxable except for attorney fees which are taxable. IRC Sec 104(a)(2).Taxability also depends upon the place of residence of the taxpayer. Conclusion: The IRS collects taxes on lump sum payments received as compensation for negligence, injury, or other wrong doing. All necessary steps must be taken to ensure that the taxes are paid in a timely manner in order to avoid late penalties or fines. If you do fail to complete the payment in a timely manner then the IRS will collect those amounts due plus penalties. The only option that you do have at this time is if it is an option to receive annuity payments instead of a lump sum in order to avoid potential future litigation given that litigants are allowed to bring up a taxation lawsuit with lump sum settlements. Furthermore, you gross income includes all items of income unless specified by the IRS that it is excluded. So the $300,000 received by John Smith as fees from jury award is taxable for federal tax income purposes. Issue
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This note was uploaded on 03/26/2012 for the course ACCT 553 taught by Professor Seda during the Spring '10 term at Keller Graduate School of Management.

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You Decide - MEMORANDUM To: John and Jane Smith From: Tanya...

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