CDS Tax Implications of Divorce 2 — Questions and Answers
Question 1: A divorcing couple sells their jointly-owned primary residence. They lived in it for 3 of the last 5 years. What is the maximum capital gain exclusion available?
- $250,000 per person ($500,000 total) (Correct answer)
- $125,000 per person ($250,000 total)
- $500,000 per person ($1,000,000 total)
- $250,000 total, split between them
Correct answer: $250,000 per person ($500,000 total)
Under IRC Section 121, each spouse may exclude up to $250,000 of gain on the sale of a primary residence if they meet the 2-of-5-year ownership and use tests, totaling $500,000 for a married couple.
Question 2: Child support payments received by the custodial parent are treated how for federal income tax purposes?
- Taxable income to the recipient
- Deductible by the payor
- Neither deductible by the payor nor taxable to the recipient (Correct answer)
- Taxable to the recipient but deductible by the payor
Correct answer: Neither deductible by the payor nor taxable to the recipient
Child support has always been tax-neutral — it is never deductible by the payor and never included in the recipient's gross income, regardless of when the divorce occurred.
Question 3: Which IRS relief provision may protect an innocent spouse from liability for tax deficiencies caused by errors or fraud on a jointly filed return?
- IRC Section 1031 (Like-Kind Exchange)
- IRC Section 6015 (Innocent Spouse Relief) (Correct answer)
- IRC Section 121 (Home Sale Exclusion)
- IRC Section 72(t) (Early Distribution Penalty)
Correct answer: IRC Section 6015 (Innocent Spouse Relief)
IRC Section 6015 provides three forms of innocent spouse relief allowing a spouse to be relieved of joint and several liability for taxes, penalties, and interest attributable to the other spouse's erroneous items.
Question 4: A QDRO (Qualified Domestic Relations Order) is used to divide which type of retirement account without triggering early withdrawal penalties?
- Traditional IRA
- Roth IRA
- Employer-sponsored qualified plans (e.g., 401(k), pension) (Correct answer)
- Health Savings Account (HSA)
Correct answer: Employer-sponsored qualified plans (e.g., 401(k), pension)
A QDRO is required to divide employer-sponsored qualified retirement plans such as 401(k)s and pensions without triggering the 10% early withdrawal penalty or immediate taxation.
Question 5: When an IRA is transferred to a spouse or former spouse pursuant to a divorce or separation instrument, the transfer is treated under IRS rules as:
- A taxable distribution to the original owner
- A tax-free transfer to the recipient spouse's IRA (Correct answer)
- A gift subject to gift tax
- Ordinary income to the recipient
Correct answer: A tax-free transfer to the recipient spouse's IRA
IRA transfers incident to divorce are treated as non-taxable transfers to the recipient's own IRA under IRC Section 408(d)(6), with no penalty or immediate tax consequence.
Question 6: After divorce, only one parent can claim the Child Tax Credit. This credit is generally available to:
- The parent who pays more child support
- The parent who claims the child as a dependent (Correct answer)
- The parent with the higher income
- Both parents, split 50/50
Correct answer: The parent who claims the child as a dependent
The Child Tax Credit follows the dependency exemption — the parent who claims the child as a dependent is eligible to claim the Child Tax Credit for that child.
Question 7: A divorce decree requires the husband to pay off a joint mortgage and keep the home. When the home is later sold, which tax consequence applies regarding the wife's original ownership?
- The wife owes capital gains tax on her share of the appreciation
- The husband can exclude up to $250,000 of gain if he meets the use and ownership tests (Correct answer)
- No taxes apply because of the divorce decree
- The husband must pay gift tax on the value transferred from the wife
Correct answer: The husband can exclude up to $250,000 of gain if he meets the use and ownership tests
The husband, as sole owner after transfer, can exclude up to $250,000 of gain under Section 121 if he meets the ownership and 2-of-5-year use tests at the time of sale.
CDS Tax Implications of Divorce 2
A divorcing couple sells their jointly-owned primary residence.
They lived in it for 3 of the last 5 years.
What is the maximum capital gain exclusion available?