Divorce Divorce and Taxes 2 — Questions and Answers
Question 1: What is the tax basis of assets transferred between spouses as part of a divorce property settlement under IRC Section 1041?
- Fair market value at the time of transfer
- Zero basis
- The transferor's adjusted basis carries over to the recipient (Correct answer)
- The average of both spouses' original basis
Correct answer: The transferor's adjusted basis carries over to the recipient
Under IRC Section 1041, transfers of property between spouses incident to divorce are nontaxable, and the recipient takes the transferor's adjusted cost basis (carryover basis).
Question 2: A spouse receives a Roth IRA as part of a divorce settlement via a transfer incident to divorce. What are the immediate tax consequences?
- The full value is taxed as ordinary income
- Early withdrawal penalties apply if under 59½
- No immediate tax consequences; the account retains its tax-free status (Correct answer)
- The recipient must pay a 10% excise tax
Correct answer: No immediate tax consequences; the account retains its tax-free status
A Roth IRA transferred incident to divorce is not a taxable event; the receiving spouse retakes ownership of the account and it retains its Roth tax-free growth status.
Question 3: Which IRS form must the custodial parent sign to allow the noncustodial parent to claim the child dependency exemption?
- Form 2120
- Form 8332 (Correct answer)
- Schedule EIC
- Form 1040-X
Correct answer: Form 8332
IRS Form 8332 (Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent) is the document a custodial parent signs to transfer the dependency claim to the noncustodial parent.
Question 4: If a divorcing spouse receives a traditional IRA as part of the settlement and immediately cashes it out, what taxes apply if they are 45 years old?
- Ordinary income tax only
- Ordinary income tax plus a 10% early withdrawal penalty (Correct answer)
- Capital gains tax only
- No tax because it was part of a divorce settlement
Correct answer: Ordinary income tax plus a 10% early withdrawal penalty
Unless the recipient rolls the funds into another IRA within 60 days, the distribution is subject to ordinary income tax plus the 10% early withdrawal penalty because the individual is under 59½.
Question 5: For tax year purposes, a couple separated in March but their divorce was not finalized until the following January. How should each file their taxes?
- Both file as Single because they were separated
- Both must file as Married (either jointly or separately) (Correct answer)
- One files as Head of Household and the other as Single
- They can each choose their preferred filing status
Correct answer: Both must file as Married (either jointly or separately)
Legal marital status on December 31 determines tax filing status; since the divorce was not finalized by year-end, both are still legally married and must file as Married Filing Jointly or Married Filing Separately.
Question 6: A divorced parent paying child support wishes to deduct those payments on their federal tax return. What will the IRS allow?
- Full deduction up to $5,000
- Partial deduction based on income level
- No deduction — child support is never tax-deductible (Correct answer)
- Deduction only if the child lives with the payer at least 50% of the time
Correct answer: No deduction — child support is never tax-deductible
Child support payments are never deductible by the paying parent under federal tax law, regardless of the amount or custody arrangement.
Question 7: What does 'innocent spouse relief' allow a divorced person to do with the IRS?
- Avoid paying taxes on all marital assets received in the divorce
- Be relieved of responsibility for tax, interest, and penalties from a joint return where the other spouse understated taxes (Correct answer)
- Claim a larger refund than originally filed
- File amended returns for all years of marriage
Correct answer: Be relieved of responsibility for tax, interest, and penalties from a joint return where the other spouse understated taxes
Innocent spouse relief (IRC Section 6015) allows a spouse to be relieved of liability for taxes, interest, and penalties arising from a joint return where the other spouse improperly reported items.
Divorce Divorce and Taxes 2
What is the tax basis of assets transferred between spouses as part of a divorce property settlement under IRC Section 1041?