CDS Tax Implications of Divorce 3

Question 1

When a divorcing spouse receives employer stock options as part of a property settlement, the tax event typically occurs:

Accepted Answer

When the receiving spouse exercises the options

Answer

For non-qualified stock options (NQSOs), the tax event occurs upon exercise, when the spread between the exercise price and fair market value is recognized as ordinary income by the exercising party.

Question 2

A divorce attorney instructs a client that alimony received under a pre-2019 agreement should be reported on their federal tax return as:

Accepted Answer

Gross income on Form 1040

Answer

Under pre-TCJA rules, alimony received under a pre-2019 agreement must be included in the recipient's gross income and reported on Form 1040 (with the payor's SSN).

Question 3

In a divorce involving rental property, a CDS should advise the client that accumulated depreciation on transferred property will result in:

Accepted Answer

Depreciation recapture taxed as ordinary income when the recipient eventually sells the property

Answer

The carryover basis under Section 1041 preserves the accumulated depreciation, so when the recipient sells, they will owe depreciation recapture tax (at up to 25%) on the prior depreciation deductions.

Question 4

Which concept describes the tax risk when one spouse receives low-basis, high-value assets while the other receives cash in a seemingly equal property division?

Accepted Answer

Hidden tax liability / inequitable after-tax division

Answer

Receiving low-basis appreciated assets creates a hidden tax liability — the recipient will owe capital gains tax upon sale, making the division inequitable on an after-tax basis despite appearing equal at face value.

Question 5

What is the tax treatment of health insurance premiums paid by an ex-spouse for the other under a divorce decree for agreements executed after 2018?

Accepted Answer

Neither deductible as alimony nor taxable as alimony income

Answer

Since the TCJA eliminated alimony's tax treatment for post-2018 agreements, health insurance premiums paid pursuant to such agreements are no longer treated as deductible alimony or taxable alimony income.

(CDS) Certified Divorce Specialist Practice Test

(CDS) Certified Divorce Specialist Practice Test

CDS Tax Implications of Divorce 3