CDS Tax Implications of Divorce 1 — Questions and Answers
Question 1: Under the Tax Cuts and Jobs Act (TCJA) of 2017, how is alimony treated for divorce agreements executed after December 31, 2018?
- Deductible by the payor and taxable to the recipient
- Not deductible by the payor and not taxable to the recipient (Correct answer)
- Taxable to the payor and deductible by the recipient
- Deductible by both parties equally
Correct answer: Not deductible by the payor and not taxable to the recipient
Under the TCJA, for agreements finalized after December 31, 2018, alimony is no longer deductible by the payor or included in the recipient's gross income.
Question 2: For a divorce agreement executed in 2016, how is alimony taxed under pre-TCJA rules?
- Deductible by the payor, not taxable to the recipient
- Not deductible by the payor, taxable to the recipient
- Deductible by the payor and taxable to the recipient (Correct answer)
- Not deductible or taxable by either party
Correct answer: Deductible by the payor and taxable to the recipient
Under pre-TCJA rules, alimony was an above-the-line deduction for the payor and included as gross income for the recipient.
Question 3: Under IRC Section 1041, what is the tax consequence when one spouse transfers appreciated property to the other spouse incident to divorce?
- The transferor recognizes capital gains on the appreciation
- The transferee pays gift tax on the fair market value
- No gain or loss is recognized by the transferor (Correct answer)
- The transfer triggers ordinary income tax for the transferee
Correct answer: No gain or loss is recognized by the transferor
IRC Section 1041 provides that transfers of property between spouses or former spouses incident to divorce are treated as gifts — no gain or loss is recognized by the transferor.
Question 4: When property is transferred between divorcing spouses under IRC Section 1041, what tax basis does the recipient (transferee) take in the property?
- Fair market value at the time of transfer
- Zero basis
- The transferor's adjusted basis (carryover basis) (Correct answer)
- The average of fair market value and the transferor's basis
Correct answer: The transferor's adjusted basis (carryover basis)
The recipient takes the transferor's adjusted basis (carryover basis), meaning any built-in gain is preserved and will be taxed when the recipient eventually sells the property.
Question 5: Which IRS filing status can a custodial parent use in the year of divorce if they paid more than half the home costs and the child lived there more than half the year?
- Married Filing Jointly
- Single
- Head of Household (Correct answer)
- Qualifying Widow(er)
Correct answer: Head of Household
A custodial parent who meets the household maintenance and residency tests qualifies for Head of Household status, which provides a larger standard deduction and lower tax rates than Single.
Question 6: Under the TCJA, who is generally entitled to claim the child dependency exemption after divorce?
- The non-custodial parent by default
- The higher-earning parent
- The custodial parent by default (Correct answer)
- The parent who pays child support
Correct answer: The custodial parent by default
The custodial parent (with whom the child lives the most nights) is entitled to the dependency exemption by default under IRS tiebreaker rules.
Question 7: A non-custodial parent wishes to claim the child as a dependent. What IRS form must the custodial parent sign to release the dependency exemption?
- Form 2120
- Form 8332 (Correct answer)
- Form 1099-DIV
- Form 4506-T
Correct answer: Form 8332
Form 8332 (Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent) must be signed by the custodial parent and attached to the non-custodial parent's return.
CDS Tax Implications of Divorce 1
Under the Tax Cuts and Jobs Act (TCJA) of 2017, how is alimony treated for divorce agreements executed after December 31, 2018?