Tax Consequences of Divorce

Question 1

a. Property transfers between spouses and former spouses, incident to divorce are

Answer 1

nontaxable event via 1041 special non recognition rule.

Question 2

1. Alimony payments

Answer 2

remained includable as GI & deductible

Question 3

Requirements to be alimony - 71

Answer 3

1. a. Payment must be in cash- 71
2. b. Payments must be received by or “on behalf of” spouse/former spouse. 71
3. c. Payments must be made “under a divorce or separation instrument”-
4. he divorce/separation agreement must not designate the cash payment as one that is excludable from GI of recipient and nondeductible to payor-
5. e. If legally separated/under decree of divorce, must not be member of the same household at time payment is made
6. f. Payor spouse must not have obligation to make payments for any period after death of payee spouse

Question 4

ALIMONY payments cant be in form of

Answer 4

property or services

Question 5

3rd party payments.

Answer 5

i. Payments to third parties sometimes acceptable

1. I.E. paying mortgage for property occupied by the other spouse.

Question 6

c. Payments must be made “under a divorce or separation instrument”- 71

Answer 6

i. Even if divorce doesn’t follow
ii. Needs to be in writing
1. Oral isn’t sufficient
2. List of expenses not sufficient

Question 7

d. The divorce/separation agreement must not designate the cash payment as one that is excludable from GI of recipient and nondeductible to payor- 71.

Answer 7

i. Gives parties flexibility

1. Payment for property settlement could be taxed at alimony rates without this rule.

Question 8

f. Payor spouse must not have obligation to make payments for any period after death of payee spouse 71

Answer 8

i. Restricted to support type payments

ii. Two part inquiry

Question 9

two part inquiry

Answer 9

1. Courts look to unambiguous condition terminating payments
2. When no ^ courts looks to language of decree to determine whether payments satisfy 71
   a. If neither satisfied, not alimony.
   b. Montly payment to attny
   i. Not alimony
   c. After death continues
   i. Not alimony.

Question 10

child suport

Answer 10

isnt alimony

Question 11

1. No deduction for pre-existing parental support.

Answer 11

a. Except under 151 for dependent exemptions

Question 12

I.E.2. I.E. if decree is 1k alimony + 500 per month child support which is 18000 a year, and only 13 k is paid

Answer 12

Apply first to child support. left over to alimony

Question 13

filing status

Answer 13

i. Important for Head of Household status- section 2

Question 14

prop transfers

Answer 14

i. Transfer property in exchange for release of marital rights
1. Taxable gain
2. States tailored law to ensure they don’t use divorce as a time to tax appreciated property

Question 15

• no gain/loss is recognized on property transfer between spouses on

Answer 15

incident to divorce- if within a year