Divorce Divorce and Taxes 2

Question 1

What is the tax basis of assets transferred between spouses as part of a divorce property settlement under IRC Section 1041?

Accepted Answer

The transferor's adjusted basis carries over to the recipient

Answer

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?

Accepted Answer

No immediate tax consequences; the account retains its tax-free status

Answer

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?

Accepted Answer

Form 8332

Answer

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?

Accepted Answer

Ordinary income tax plus a 10% early withdrawal penalty

Answer

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?

Accepted Answer

Both must file as Married (either jointly or separately)

Answer

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.

Divorce Practice Test

Divorce Practice Test

Divorce Divorce and Taxes 2