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

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    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?

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    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

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