Tax Implications of Divorce Flashcards

After divorce, which parent can claim the Child Tax Credit for a dependent child?

Answer: The custodial parent by default, unless Form 8332 releases the exemption to the non-custodial parent

The custodial parent has the default right to the Child Tax Credit, but can release it to the non-custodial parent by signing IRS Form 8332.

What is the tax treatment of life insurance proceeds paid to a former spouse as named beneficiary after the insured ex-spouse dies?

Answer: Generally received income-tax-free under IRC Section 101(a)

Life insurance death benefits are generally received income-tax-free by the beneficiary under IRC Section 101(a), regardless of the beneficiary's relationship to the insured.

A divorce decree requires one spouse to pay the other's health insurance premiums. How are these payments typically treated for tax purposes?

Answer: If designated as alimony under a pre-2019 agreement, possibly deductible; otherwise treated as non-deductible personal expense under post-TCJA rules

Health insurance premiums paid as part of a divorce settlement are subject to the same alimony rules — deductible/taxable pre-TCJA or non-deductible/non-taxable post-TCJA based on the agreement date.

How does the IRS 'innocent spouse relief' apply to a divorced taxpayer?

Answer: It may relieve a spouse from liability for taxes, interest, and penalties arising from a joint return where the other spouse improperly reported items

Innocent spouse relief (IRC Section 6015) can release a spouse from joint tax liability when the other spouse improperly reported income or claimed deductions without the innocent spouse's knowledge.

In a divorce involving a privately-held business, what is the primary tax concern when dividing business interests?

Answer: The carryover basis rule means the receiving spouse inherits all embedded tax liabilities in the business, which may not be reflected in the FMV used for settlement

When business interests are transferred, the receiving spouse takes the transferor's carryover basis, meaning the settlement value may overstate net proceeds after future embedded taxes on appreciation.

What is the Dependent Care FSA (Flexible Spending Account) implication for divorced parents?

Answer: Only the parent who claims the child as a dependent can use a Dependent Care FSA for that child's expenses

The Dependent Care FSA benefit can only be used by the parent who claims the child as a dependent for tax purposes, typically the custodial parent.

A divorced taxpayer who is required to pay alimony under a pre-2019 agreement stops making payments. What is the tax consequence of the 'front-loading' or 'recapture' rule if payments decrease substantially in the first 3 years?

Answer: The payer must include in income (recapture) excess alimony paid in years 1 and 2 above allowable amounts

The alimony recapture rule (under pre-TCJA agreements) requires the payer to include in income alimony paid in years 1 and 2 that exceeded the average of later years by more than $15,000.