Todd and Fiona Are Negotiating a Divorce Settlement

question 111

Multiple Choice

Todd and Fiona are negotiating a divorce settlement.Todd has offered to pay Fiona $12,000 each year for 10 years,but payments cease upon Fiona's death.What are the tax implications of this proposition?
I.Fiona must recognize Gross Income when the money is received.
II.Todd has a deduction for Adjusted Gross Income in the year of payment.
III.Since the payments are in cash and there is no obligation to pay more after Fiona's death,the payments are classified as alimony.
IV.If the payments qualify as child support,Fiona recognizes no gross income and Todd has no deduction from Adjusted Gross Income.
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• A)Only statement I is correct.
• B)Only statement IV is correct.
• C)Only statements I and II are correct.
• D)Only statements I,II,and III are correct.
• E)Statements I,II,III,and IV are correct.

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Definitions:

Withdrawals

Amounts of money taken out from a business by its owner(s) for personal use.

Provision

An amount set aside in the accounts of a company to cover a future liability or decrease in the value of an asset.

Accounts Receivable

Liabilities of customers to a firm for provisions or merchandise that have been delivered but payment is outstanding.

Capital Balance

The amount recorded in a shareholder's or partner's equity account, reflecting their investment in the business.