Question

1. Tim and Diane were divorced in the current year (Year 1). Under the divorce agreement, Diane is to receive $100,000 in the current year, $60,000 next year (Year 2) and nothing thereafter. The payments were to cease upon Diane’s death or remarriage. How much, if any, should Tim have to claim as alimony recapture in Year 3?

$0

$30,000

$115,000

$122,500

2.

Cate was recently diagnosed with lung cancer and has been certified by her doctor, on June 1st of the current year, as terminally ill. On July 1st of the current year, Cate sold her life insurance policy with a face value of $500,000 to a viatical settlement provider for $340,000. Assuming she paid $50,000 in premiums, how much of the $340,000 proceeds must she include in her gross income for the current year?

$0

$34,000

$50,000

$290,000

Answer 1

1. $122500

Calculation : Second year received ...........$60000

Third year received........................$ 0

(-) Threshold ..........................$15000

             Second year Recapture Amount = $ 45000

                   

Calculation of First year Recapture Amount

                       Second year received ...........$60000

Third year received........................$ 0

(-)Second year Recapture Amount...$45000

$ 15000

                                              Divide by 2

$ 7500

                     First year received.................$100000

                     Second year received .............$ 7500

   (-) Threshold ..........................$15000

                   First year Recapture Amount      $ 77500

Total Recapture Amount

                    First year Recapture Amount      $ 77500

                 Second year Recapture Amount...$ 45000

$ 122500

2. Proceeds - $ 340000

(-) Premiums - $ 50000

   Gain - $ 290000