Tax Research Problems
Divorce. J and M are obtaining a divorce after ten years of marriage. They have two children. A draft of the divorce agreement and property settlement between them states that they will have join custody of the children. They plan to live in the same general area and each child will live half of each year with each parent. Since J's AGI is $40,000 and M's is $15,000, he will pay her $100 per month for each child ($2,400 per year) and $500 per month for her support. The $500 ceases on his or her death, her remarriage, or when her AGI equals his. In addition, J agrees to continue to pay premiums of $50 per month on his life insurance policy payable to her. All jointly owned property will be distributed as follows:
| |
Basis |
Market Value |
Transfer to |
|
Home ................................
|
$50,000
|
$80,000
|
M
|
|
Furnishings .........................
|
20,000
|
15,000
|
M
|
|
Investments ........................
|
10,000
|
30,000
|
J
|
Each will keep his or her individually owned personal items and an automobile. This is an amicable divorce and they both request your advice. Their objective is to maximize total tax benefits without making too many changes to the agreement. Use tax-planning techniques when possible in responding to the following questions.
a. Who will be able to claim the children as dependents?
b. What is each one's filing status for the current year if neither one remarries?
c. Does the $500 per month qualify as alimony? Does the $50 per month qualify as alimony?
d. J expects to make the $500 and $50 payments for three months while legally separated before the divorce. What are the tax effects during this period?
e. What is the tax effect of the distribution of jointly owned property to J and to M?
f. What tax planning advice could you give to J and M that would decrease their combined tax liability?
Facts
Issue and Conclusion 1
Analysis 1
Cite Tax Authority
Apply Tax Law to Facts
Tax Law and Analysis
Conclusion