Question

Problem 4-45 (LU. 4) Nell and Kirby are in the process of negotiating their divorce agreement, to be finalized in 2020. What should be the tax consequences to Nell and Kirby if the following, considered individually, became part of the agreement? a. In consideration for her one-half Interest in their personal residence, Kirby will transfer to Nell stock with a value of $200,000 and $50,000 of cash. Kirby's cost of the stock was $150,000, and the value of the personal residence is $500,000. They purchased the residence three years ago for $300,000. The transfer of is a nontaxable event Nell's basis for the stock is $ Kirby's basis in the house is $ b. Nell will receive $1,000 per month for 120 months. If she dies before receiving all 120 payments, the remaining payments will be made to her estate. the payments are excluded from Nell's gross income as they are received by her, and Kirby may not deduct the payments. c. Nell is to have custody of their 12-year-old son, Bobby. She is to receive $1,200 per month until Bobby (1) dies or (2) attains age 21 (whichever occurs first). After either of these events occurs, Nell will receive only $300 per month for the remainder of her life. The monthly payments are considered the payments are excluded from Nell's gross income as they are received by her, and Kirby may not deduct the payments,

Answer 1

N and K will be responsible for following are the tax consequences as discussed below: a. K will transfer stock to N. It is non-taxable to N and Kas transfer of stock is not taxable according to law. Basis of divorce will be stock of $150,000 and cash payment of $50,000. Cash payment will be considered as alimony. K's basis of house is $300,000. b. In the given scenario, when N has died before receiving 120 payments, then whole payment will be made to her estate. It will not be treated as alimony as will not cease upon Ns' death, thus it would not be included in her gross income. Also, K cannot claim deduction for the same. C. N has custody of child B and is entitled to receive an amount $1,200 per month until B dies or attains age of 21. Monthly payment received for child support is treated as alimony. On death of B, when she will receive $300 per month, it will be considered as alimony which should be taken into consideration while computing gross income whereas $900 received per month is treated as child support. Thus, K can avail deduction of $4300 as a deduction for AGI.