Question

Casper and Cecile divorced in 2018. As part of the divorce settlement, Casper transferred stock to Cecile. Casper purchased the stock for $25,000, and it had a market value of $43,000 on the date of the transfer. Cecile sold the stock for $40,000 a month after receiving it. In addition, Casper is required to pay Cecile $1,500 a month in alimony. He made five payments to her during the year. What are the tax consequences for Casper and Cecile regarding these transactions? If an amount is zero, enter "$0". a. How much gain or loss does Casper recognize on the transfer of the stock? $ b. Does Casper receive a deduction for the $7,500 alimony paid? Yes c. How much income does Cecile have from the $7,500 alimony received? $ d. When Cecile sells the stock, how much does she report? Cecile will report a gain of $ .

Answer 1

Answer:

Answer explained below

Explanation:

1) As per IRS, in a divorce case, the party making the payments is eligible to deduct the alimony & separate maintenance payments, whereas the party receiving the payment is required to include the amounts received in his/her gross income. However, any transfer of property other than cash under a divorce is not taxable. The party making transfer is not entitled to a deduction for transferred property and doesn’t recognize any gain or loss on the transfer. The party receiving the property also doesn’t recognize income and include the item on cost basis equal to basis of the party making transfer.

2) As stated above, the party making transfer doesn’t recognize any gain or losses. Casper doesn’t need to recognize gains for the stock transfer.

3) Since Casper is making alimony payments, which is included in Cecile’s gross income, Casper is allowed to deduct the $7,500 alimony paid.

4) Cecile has entire $7,500 as income for the alimony received.

5) Cecile needs to report entire recognized capital gain as the stocks were transferred on cost basis. So, amount needs to be reported = $40,000 - $25,000 = $15,000