Share
Explore BrainMass

Terms of property or alimony payment to be tax free to Elizabeth

Kevin and Elizabeth are negotiating a divorce settlement. Kevin is in the
35 percent marginal tax bracket and Elizabeth is in the 15 percent marginal
tax bracket. Kevin has offered to pay Elizabeth $15,000 each year for
10 years; payments would cease if Elizabeth dies before the end of the 10-
year period. Elizabeth is willing to settle for that amount only if the payments
qualify as a tax-free property settlement because she needs at least
$15,000 after tax to meet her expenses.

a. How much would Elizabeth have to receive in taxable alimony payments
from Kevin to have the equivalent of a $15,000 tax-free payment?

b. If Kevin agrees to an $18,500 alimony payment, what is the after-tax
cash flow for Kevin and Elizabeth? By how much does their cash flow
improve over the proposed $15,000 property settlement payment?

Solution Preview

Taxation

Kevin and Elizabeth are negotiating a divorce settlement. Kevin is in the
35 percent marginal tax bracket and Elizabeth is in the 15 percent marginal
tax bracket. Kevin has offered to pay Elizabeth $15,000 each year for
10 years; payments would cease if Elizabeth dies before the end of the 10-
year period. Elizabeth is willing to settle for that ...

Solution Summary

The terms of property or alimony payments to be tax free to Elizabeth are examined.

$2.19