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    Personal Income Tax

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    Jesse and Tracy were divorced. Their only marital property was a personal residence with a value of $500,000 and cost of $250,000. Under the terms of the divorce agreement, Tracy would receive the house and Tracy would pay Jesse $100,000 each year for 5 years. If Jesse should die, the remaining payments would be made to his estate. Jesse and Tracy lived apart when the payments were made to Jesse. The divorce agreement did not contain the word "alimony."

    a. Jesse must recognize a $62,500 [$250,000 - $125,000)] gain on the sale of his interest in the house.

    b. Jesse recognizes alimony income of $100,000 each year.

    c. Tracy is allowed to deduct $100,000 each year for alimony paid.

    d. Tracy is not allowed any alimony deductions.

    e. None of the above.

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    Solution Preview

    Answer: d.

    The tax code regards payments that constitute "alimony" as tax deductions for the payer and as ...

    Solution Summary

    This solution is comprised of a detailed explanation to answer the tax deductions as a result of divorce.