John Smith Tax Issues:
John Smith was not considered the injured party in the lawsuit, he was the acting attorney representing a client whom was injured in an incident. John Smith was providing a service at the time and the $300,000 is considered payment for the service of representation in a legal matter. According to section 61 of the Internal Revenue Code any gross income is taxable for federal income tax regardless of the source or matter in which it was obtained. In particular compensation for services in the form of “fees” is specifically mention in this section. During the practice of representing his client John
Smith incurred expenses that amount to $25,000 total. These expenses were necessary in order to reasonably provide complete and accurate service to his client. According to section 162(a) of the Internal Revenue Code an expense is considered for business purposes when it is ordinary and necessary to carry out the service, an expense that was actually paid during the course of providing the service and it has to be incurred while carrying out the course of the service. These types of expenses are applicable per publication 535 for 2010. By pursuing and using the maximum amount of deductions available to him John Smith can expect lower his amount of taxable income to a more favorable amount. In addition to finding all of the business expenses that he has incurred while providing his service, he also has two other options he may want to pursue to minimize his tax consequences. First, John Smith may want to consider receiving the $300,000 income in the form of an annuity payment. Considering Internal Revenue Code section 72 an annuity is taxable income to the point where the payments are recovered. John Smith by receiving a yearly annuity payment would defer the taxes on the lump-sum balance of the $300,000 over the life of the annuity. Secondly, in