Divorce Divorce and Taxes 3

Question 1

A divorced couple sells their home two years after the divorce. The ex-wife continued living there while the ex-husband did not. Who qualifies for the Section 121 capital gains exclusion?

Accepted Answer

Only the ex-wife qualifies because she meets the use test

Answer

Under Section 121, the use test requires the taxpayer to have lived in the home as a primary residence for two of the five years before the sale; the ex-wife meets this test, but the ex-husband does not.

Question 2

Which of the following correctly describes the tax treatment of legal fees paid to an attorney during a divorce?

Accepted Answer

Personal divorce legal fees are generally not deductible; fees for tax advice may be deductible

Answer

Personal legal fees related to divorce are not deductible as personal expenses, but fees specifically paid for tax advice in connection with the divorce may qualify as a miscellaneous itemized deduction.

Question 3

What happens to the filing status of a parent who has primary custody of their child but does not claim the child as a dependent?

Accepted Answer

They may still qualify as Head of Household based on the custody arrangement

Answer

Head of Household status is determined by whether the taxpayer paid more than half the cost of maintaining a home for a qualifying person, not by who claims the dependency exemption, so a custodial parent may still qualify.

Question 4

Under a divorce agreement finalized in 2017 (pre-TCJA), the paying spouse deducts $24,000 in alimony. What are the federal tax implications for the recipient?

Accepted Answer

The recipient must report $24,000 as ordinary income

Answer

Under pre-TCJA rules (agreements before January 1, 2019), alimony is deductible by the payer and must be included as ordinary taxable income by the recipient.

Question 5

A divorcing spouse is awarded stock with a current market value of $50,000 and a cost basis of $10,000. If they sell the stock one year later for $55,000, what is the taxable gain?

Accepted Answer

$45,000 (gain using the carryover basis of $10,000)

Answer

Under IRC Section 1041, the recipient takes the transferor's $10,000 carryover basis, so the taxable gain on sale for $55,000 is $55,000 - $10,000 = $45,000.

Divorce Practice Test

Divorce Practice Test

Divorce Divorce and Taxes 3