The Tax Issues of Divorce

Question 1

Which act required certain spousal support payments to be included in the recipient spouse’s income?

Answer 1

The Revenue Act of 1942 required certain spousal support payments to be included in the recipient spouse’s income. Prior to 1942, there was no statute regarding the taxation of support.

Question 2

Spousal support payments must stop for the payments to qualify as deductible spousal support payments upon the occurrence of which of the following?

Answer 2

The payments must stop when the recipient dies. If the payor spouse is required to make payments after the death of the recipient spouse, then none of the payments before (or after) the death of the recipient spouse will qualify as spousal support.

Question 3

Which of the following transfers of property is a taxable transfer?

Answer 3

A transfer to a former spouse within six years of a divorce must be in accordance with the divorce decree to qualify as non-taxable.

Question 4

Which of the following terms describes reporting certain deductions taken in a previous year as income?

Answer 4

Several provisions of the code provide for the “recapture” of tax benefits previously taken by the taxpayer through deductions, credits, or exclusions.

Question 5

Al bought corporate stock for $1,000. He transferred the stock to his ex-wife, Carrie, as part of their divorce settlement when the stock was worth $2,000. Carrie subsequently sold the stock for $3,000. Which of the following would be the tax consequence?

Answer 5

Carrie gets to use Al’s basis to calculate her gain: $3,000—$1,000 = $2,000.

Question 6

Which of the following is the governing code section that permits the custodial parent to take the Earned Income Tax Credit?

Answer 6

The Earned Income Tax Credit is governed by IRC §32.

Question 7

Harriet and Marcus are selling their residence, which they have lived in for one year. They are still married, and Marcus is over the age of 55. What amount are they eligible to exclude from capital gains?

Answer 7

They only lived in their house for one year, so they do not qualify for the gain exclusion.

Question 8

Vicki and David are selling their residence, which they have lived in and owned for three years. They are still married, and Vicki is over the age of 55. What amount are they eligible to exclude from capital gains?

Answer 8

As a couple, they qualify for a $500,000 exclusion. The couple must live in their residence for two of the last five years to qualify for the exclusion.

Question 9

Which of the following best describes the relationship between the taxability and deductibility of spousal support?

Answer 9

If spousal support is taxable to the recipient, then it is always deductible by the payor.

Question 10

Elliott and Grace divorced in November 2015 after 24 years of marriage. In past years, they always filed a joint return. Elliott pays child support to Grace who has primary custody of their 16-year-old son. Elliott lives alone and has no other dependents. For 2015, what filing status does Elliott qualify for that gives him the greatest tax benefit?

Answer 10

Elliott only qualifies for Single status.

Question 11

For 2015, which of the following filing statuses does Grace (from question 10) qualify for that gives her the greatest tax benefit?

Answer 11

Grace qualifies as Head of Household because Trevor is her dependent.

Question 12

Divorcing parties have which of the following types of flexibility regarding the deductibility (taxability) of spousal support?

Answer 12

They only have the flexibility to exclude spousal support from being taxable and deductible in the divorce decree.

Question 13

What is required in order to deduct spousal support payments?

Answer 13

Spousal support payments must be paid in cash or its equivalent.

Question 14

Adam and Mary used and owned their residence during their eight-year marriage. If Mary has the right to possession of the residence until it is sold in six years, Adam qualifies for the capital gain exclusion for the sale of the residence under which of the following conditions?

Answer 14

According to the use period rules, Adam can use Mary’s “use period” to qualify for the exclusion as long as he continues to own the residence.

Question 15

If there is recapture of spousal support, how will the recapture be treated for tax purposes?

Answer 15

Spousal support recapture is reported as income in the third post- separation year.

Question 16

Dan is required to pay Julie $4,000 per month in spousal support for five years. In which of the following situations will Dan be subject to the recapture rules if support stops in the second year?

Answer 16

Cohabitation, even though it is frequently included in divorce decrees, is not one of the exceptions to the recapture rules.

Question 17

Spousal support is deductible in which of the following situations?

Answer 17

Spousal support can be deducted only if they file separate returns.

Question 18

A current trend regarding spousal support is to do away with which of the following?

Answer 18

Permanent spousal support is not very common anymore.

Question 19

Meg and Jim are in the middle of the divorce process and expect their final decree within the next six months. Jim was ordered to pay Meg $6,000 per month in temporary support for 18 months. When the divorce is final, Meg receives a large inheritance and they agree to discontinue spousal support. How will the spousal support be treated on Jim’s taxes?

Answer 19

Temporary spousal support is one of the exceptions to the recapture rules.

Question 20

Jeff paid Marilyn spousal support for two years. Jeff will have to pay additional tax due to recapture if the spousal support was:

Answer 20

Recapture applies because spousal support cannot drop by more than $15,000 in the first three years.

Question 21

Ty and Keeley bought a vacation home 15 years ago for $530,000. Before their divorce was final, they sold their vacation home for $330,000. The costs associated with the sale were $20,000. What is the tax consequence of the sale?

Answer 21

This is a loss of $220,000, and they cannot deduct it.

Question 22

Sellers are limited in how often they can sell a house and qualify for the gain exclusion. Which of the following does NOT qualify as one of the exceptions to this limitation?

Answer 22

A new baby is not one of the exceptions to the two-year requirement.

Question 23

Harry and Luanne sold their home and deferred gain from the sale of the previous residence before the change in the tax law. What form was used to report the sale of the previous residence?

Answer 23

Form 2119 was used to report gain on sales prior to the change in the law and any deferred gain affects the basis of the replacement home.

Question 24

Which of the following does NOT increase the cost basis of a home?

Answer 24

Carpeting is a repair and does not add to the cost basis of the home.

Question 25

Joel bought his home for $100,000. He added two bedrooms for $30,000, finished the basement for $10,000, and repaired the furnace for $3,000. What is the cost basis of his home?

Answer 25

The addition of the bedrooms and finishing the basement increases the basis of the property to $140,000.

Question 26

Anna and John are married and have both owned and lived in their home for the past eight years. They originally paid $300,000 for this home and recently sold it for $600,000. They are purchasing a new home for $400,000. What is their taxable capital gain on the sale?

Answer 26

The $500,000 exclusion wipes out any gain they would have from the sale of their home, which was $300,000.

Question 27

Bob, who is single and 42, bought his home for $200,000. He sold it 11 years later for $500,000. The realtor’s commission on the sale was $30,000. What is Bob’s taxable capital gain on the sale of his home?

Answer 27

The realtor’s commission reduces the gain from $300,000 to $270,000 and the exclusion makes $250,000 non-taxable. The taxable gain would be $20,000.

Question 28

Can the custodial parent transfer the dependency exemption to the non-custodial parent?

Answer 28

The custodial parent can transfer the dependency exemption every year or for multiple years.

Question 29

Linda, who is single and 36, sold her home for $500,000. She paid $90,000 for it in 1995 and has lived in it since she bought it. She paid $10,000 in selling expenses. Linda has a mortgage on the home in the amount of $100,000. What is Linda’s taxable capital gain on the sale of her home?

Answer 29

Her gain is $400,000, and she qualifies for the $250,000 exclusion. Therefore, her taxable gain is $150,000.

Question 30

Which of the following Internal Revenue Code sections permits spouses or former spouses to transfer property tax-free?

Answer 30

IRC §1041 permits tax-free transfers to spouses or ex-spouses if all requirements are met.

Question 31

Which of the following married couples does NOT qualify for the gain exclusion when they sell their home?

Answer 31

Jack and Danielle did not own their home for two years.

Question 32

Lee purchased a parcel of land before he got married. Years later, he transferred the land to his wife, Andrea, to satisfy property division requirements during their divorce. The basis of the property is:

Answer 32

A transfer pursuant to a divorce gets the same basis as the transferor.

Question 33

Mary assigns an annuity contract to Greg, pursuant to the terms of their divorce. Tax on the annuity contract is to be paid by:

Answer 33

When the annuity is paid out, part of the payment will be taxed to Greg.

Question 34

George is required to transfer a life insurance policy he owns to his ex-wife Jane, pursuant to the divorce decree. He is also required to continue paying the premiums, and the decree states they are deemed spousal support. What is the tax consequence?

Answer 34

Since the premiums are required in the decree and Jane owns the policy they qualify as spousal support.

Question 35

Which of the following is NOT to be included in QDRO?

Answer 35

A QDRO cannot pay out benefits that already go to another alternate payee.

Question 36

Which of the following makes a QDRO qualified?

Answer 36

The QDRO is qualified when it has been accepted by the plan administrator.

Question 37

Which of the following is the plan administrator required to do when participants ask for a distribution from a qualified plan?

Answer 37

The plan administrator is required to provide direct rollover options pursuant to The Unemployment Compensation Amendment of 1992.

Question 38

Which method of transferring IRAs will never be subject to income tax and penalties?

Answer 38

The other three options must be completed within 60 days or there will be tax and possibly penalties.

Question 39

What is the maximum number of days an individual has to complete an IRA rollover?

Answer 39

You have 60 days to complete a rollover.

Question 40

Which asset is divided by a QDRO?

Answer 40

A QDRO can be used to divide a qualified defined benefit plan.

Question 41

Evan has a medical savings account at work that he and his wife Kristen will split as part of the divorce. Which of the following actions must they take to divide this account?

Answer 41

IRA rules apply to medical savings accounts; a copy of the divorce decree would be provided to the administrator.

Question 42

Martha, age 57, is to receive half of the $82,000 in John’s 401(k) account in their divorce. She elects the option to keep her account with John’s company as they are getting such a good return. Thirty days later, she hears about the 72(t)(2)(C) provision and withdraws $5,000 to buy new furniture. What is the tax consequence of the distribution?

Answer 42

Martha did not take the distribution before she had the account set up in her name and does not qualify for the penalty exception.

Question 43

Lois, age 62, was awarded $48,000 from her husband’s 401(k) in their divorce which she transferred to an IRA. After hearing about 72(t)(2)(C), she then took out $12,000 to take a trip to Europe. What is the tax consequence of the distribution?

Answer 43

Lois will have to pay the tax, but the penalty does not apply because Lois is over age 591⁄2.

Question 44

Marty, age 48, is to receive half of Cindy’s 401(k) account in their divorce. He decides to have the plan administrator transfer his share to an IRA in his name. Before the transfer he takes out $10,000 pursuant to the 72(t)(2)(C) provision. What is the tax consequence of the $10,000 distribution?

Answer 44

Marty took the distribution before he transferred his share of the 401(k) and qualifies for the penalty exception.

Question 45

How is spousal support taxed?

Answer 45

The payor deducts spousal support, and the recipient includes it in income.

Question 46

If Larry is ordered to make payments to his ex-wife Luanne, which of the following would cause them to be nondeductible spousal support?

Answer 46

The ex-spouses cannot live together and have deductible spousal support.

Question 47

John is required to pay Emily $800 per month for two years. How much is John’s recapture problem?

Answer 47

Spousal support is less than $15,000 and not subject to recapture.

Question 48

Which of the following spousal support payments is NOT deductible even if included in a court order?

Answer 48

Services such as painting provided by a spouse do not qualify as spousal support.

Question 49

Which of the following correctly describes the rules regarding IRAs in a divorce?

Answer 49

An IRA can be transferred by changing the name on the IRA, and there is no 60-day rollover requirement.

Question 50

Which of the following is NOT another name for spousal support?

Answer 50

Child support is not spousal support.

Question 51

Which of the following will be the primary benefit of a carefully structured settlement where the payor makes larger support payments to the recipient spouse?

Answer 51

Under a carefully structured settlement, the payor spouse could reduce his or her tax obligation by making larger support payments to the recipient spouse. Both spouses would end up with more money because the higher payments would result in a lower after-tax cost to the payor spouse, and the payee would have more income.

Question 52

Sherri has a tax-deferred annuity that will be transferred to John, her ex-husband, per the divorce decree. How is the transfer taxed and who will have to pay the tax?

Answer 52

John will be taxed when he receives distributions.

Question 53

Bill is ordered to pay $500 per month in spousal support to his ex-wife Barb. She tells him that he can skip three months of support payments if he fixes her roof. Bill paid nine months of support and fixed the roof. How much can Bill deduct as spousal support for the year?

Answer 53

He can only deduct the cash payments.

Question 54

Which of the following payments falls within the literal reading of the spousal support rules?

Answer 54

Annuity payments meet the requirements for qualifying as spousal support. To be safe, one should exclude any annuity payments from spousal support treatment in the divorce decree.

Question 55

For which of the following tax benefits does the non-custodial parent qualify?

Answer 55

The non-custodial parent can only qualify for the child tax credit, not any of the other benefits.

Question 56

Alan pays Alice $600 per month in spousal support. Alice had some car trouble and asked Alan if he could pay her $400 more in support for two months. Alan paid all of his regular payments plus the additional support. How much spousal support can Alan deduct for the year?

Answer 56

Only the $600 per month is deductible because they did not modify the decree.

Question 57

Linda and Jeff bought a home for $100,000. When they divorced three years later, the home was worth $300,000. They did not have a mortgage on the home. Linda bought Jeff out of his share by paying him $150,000. What is Linda’s basis in the home?

Answer 57

Linda gets Jeff’s basis in the home, which is the original price that Jeff paid for the house.

Question 58

Martha and Phil own their residence as equal joint owners. Martha has been ordered to pay the mortgage payments on the home. Which of the following is the tax treatment of Martha’s payments?

Answer 58

Since she is only obligated for half of the mortgage, Martha can deduct half of the principal and interest payments as spousal support. The mortgage interest on the other half of the payment is an itemized deduction.

Question 59

Which of the following parents would qualify for the earned income credit?

Answer 59

Sam will qualify because his income is low enough.

Question 60

How is marital status determined in the year the divorce takes place?

Answer 60

December 31 is the measuring date for the year.

Question 61

A Qualified Domestic Relations Order (QDRO) permits:

Answer 61

QDROs allow a qualified retirement plan to be transferred to an ex- spouse.

Question 62

Why would the IRS want to reclassify spousal support as child support?

Answer 62

Spousal support payments are deductible by the payor; child support payments are not. The IRS generates more tax dollars by classifying a payment as “child support” instead of “spousal support.”

Question 63

Brad and Linda were divorced on May 1, 2010. Their divorce decree granted occupation of their jointly-owned home to Linda until it could be sold, at which time the proceeds would be split 50/50. It was sold on May 1, 2015 with total capital gains of $300,000. Which of the following is true?

Answer 63

Since they both own the home, they each qualify for the $250,000 exclusion.

Question 64

Brian is paying Emma child support of $2,000 per month for their three children. The child support declines by $400 when each child reaches age 18. How much, if any, of the monthly child support payments should be taxed as spousal support?

Answer 64

Spousal support has to drop for the child contingency rules to apply.

Question 65

Mick and Jenny are getting a divorce. Mick’s business is valued at $24,000 and he is paying Jenny $12,000 in a property settlement note. He pays her $1,100 per month for 12 months. How much of each monthly payment is taxable?

Answer 65

$100 is taxable interest.

Question 66

Sheila and Evan have a child, Adam. Sheila pays $1,000 per month to Evan for spousal support. Which of the following is NOT considered a contingency related to a child?

Answer 66

This is not a child-related contingency. The decree does not state that spousal support will end when Adam turns 19; Adam just happens to be 19 years old when spousal support ends.

Question 67

Tony and Sylvia are getting a divorce. Tony’s business is valued at $48,000, and he is paying Sylvia $24,000 in a property settlement note. He pays her $2,200 per month for 12 months. Why is any portion of the note taxable or non-taxable?

Answer 67

The additional $200 per month represents an interest payment and is taxable.

Question 68

Which of the following will occur if either the “six-month rule” or the “multiple reduction rule” applies?

Answer 68

The IRS does this to prevent income shifting to the spouse with the lower tax rate.

Question 69

Which of the following statements in a divorce decree is NOT a contingency related to a child?

Answer 69

This is not a child-related contingency. Their daughter happens to be 20 when the specified five years of spousal support end, but the support does not end because she turns 20.

Question 70

If the six-month rule applies, then re-characterization will take effect:

Answer 70

If spousal support violates the six-month rule, it will not be deductible or taxable from the day it is paid.

Question 71

How can the safe harbor rule help your divorcing clients avoid having any spousal support reclassified as child support?

Answer 71

There is no safe harbor rule.

Question 72

Aaron and Michelle have a daughter, Julie, age three. She lives with Michelle four days a week and Aaron three days a week. Both Aaron and Michelle are employed outside the home and each pays half of the $4,000 per year that it costs to have Julie in a daycare center during the work-week. Who can claim the childcare credit—and for what amount?

Answer 72

Only the custodial parent can claim the childcare expenses that he or she pays.

Question 73

Which of the following filing statuses would NOT permit a taxpayer to take the childcare credit?

Answer 73

A taxpayer filing as Married Filing Separately does not qualify for the childcare credit.

Question 74

Which parent is entitled to take the childcare credit?

Answer 74

The custodial parent claims the credit for the expenses he or she paid.

Question 75

What information can be found on an individual tax return (Form 1040)?

Answer 75

Depreciation on a rental property can be found on Schedule E of the 1040.

Question 76

Which of the following individuals will NOT qualify as an abandoned spouse based upon the description provided?

Answer 76

Mike is not considered an abandoned spouse because he filed a joint tax return with his spouse.

Question 77

An individual is able to claim a certain deduction on their tax return for each person in their household. What is this is called?

Answer 77

A personal exemption is a tax deduction for an individual taxpayer and any qualifying members in the household.

Question 78

From which of the following is interest tax-exempt?

Answer 78

Interest from a municipal bond is tax-exempt interest.

Question 79

What dividend income is NOT reported on the 1040 tax return?

Answer 79

Insurance dividends are a return of principal and are not income.

Question 80

Andrea is receiving spousal support from Mike and is refusing to provide her Social Security number to him. What is the fine she will have to pay for withholding her Social Security number?

Answer 80

The penalty for not providing your Social Security number is $50.

Question 81

Which of the following would disqualify a taxpayer from filing a Head of Household?

Answer 81

The child has to live with the person who is filing as Head of Household for more than half of the year.

Question 82

How is income divided between a couple in the year the divorce is final in a community property state?

Answer 82

Earned income after the divorce is final is allocated to the spouse who earned it in a community property state.

Question 83

Which of the following tax carryforwards does not have a rule for allocation between spouses?

Answer 83

There is no rule for allocating alternative minimum tax credit. The other options all have a rule for allocation.

Question 84

Childcare expenses for a child without disabilities can qualify for the tax credit for child and dependent care expenses as long as the child is no older than:

Answer 84

The child has to be less than 13 years old.

Question 85

Which of the following tax carry forwards affects the basis of an asset upon transfer in a divorce?

Answer 85

Any passive activity loss carryforward is added to the basis of the asset transferred in a divorce. It would reduce the taxable gain when the asset is sold.

Question 86

When is a couple considered married for tax purposes?

Answer 86

If one spouse just moves out of the house, he or she is still considered married.

Question 87

Amanda receives $4,000 per year in spousal support and has no other income. To which retirement account can Amanda contribute?

Answer 87

Spousal support is considered income for purposes of contributing to IRAs, including Roth IRAs.

Question 88

Who can benefit from the retirement savings credit?

Answer 88

Angela’s spousal support qualifies as income so she qualifies for the credit.

Question 89

Taxable income from a business is calculated by subtracting:

Answer 89

Business income minus business expenses is the amount that is taxable.

Question 90

Which form is used to report income from rental property?

Answer 90

Rental income is reported on Schedule E.

Question 91

Which expense should be added back to show the true cash flow from rental property?

Answer 91

Depreciation is the cost of an asset that was purchased previously.

Question 92

Accumulating all of one’s expenses in one year to maximize the itemized deductions for that year is called:

Answer 92

Bunching is a way to take a tax benefit as soon as possible. It also is a way to itemize one year and then use the standard deduction the next year. It is a term of art.

Question 93

Which tax credit is refundable?

Answer 93

The earned income tax credit is refundable. The credit is paid even if all of the taxes that were withheld are refunded to the taxpayer. There is a lot of fraud involving the earned income credit.

Question 94

Which filing status has the highest tax rates?

Answer 94

Married Filing Separately has the highest tax rates, and the taxpayer cannot qualify for most credits that he or she would otherwise qualify for.

Question 95

Which payments are never taxable?

Answer 95

Child support is never taxable.

Question 96

What is the difference between a tax deduction and a tax credit

Answer 96

Tax credits are better because they reduce the tax dollar for dollar.

Question 97

Debbie is 40 years old, divorced, and does not work. She receives $2,000 per month in spousal support. What is the most that she can contribute to her IRA in 2015?

Answer 97

The maximum contribution limit for someone under 50 is $5,500 for 2015. If you are over 50 you can contribute another $1,000.

Question 98

How many years does the innocent spouse have to apply for relief under the innocent spouse rule?

Answer 98

An individual has two years until after the IRS has taken action to collect on the tax debt.

Question 99

Stan moved to a new home. His old commute from work to home was three miles and his new commute is five miles. At least how many miles does his new job have to be from his old home to qualify for the moving expense deduction?

Answer 99

50+3=53.

Question 100

Bill and Sue bought a “fixer-upper” rental property 15 years ago for $30,000. Before their divorce was final, they sold the rental property for $390,000. The sale’s costs totaled $27,300. Do not factor in depreciation recapture. What is their taxable gain?

Answer 100

The taxable gain is: ($390,000–30,000) – 27,300 = $332,700.