Frank and Lilly are negotiating a divorce settlement.Frank has offered to pay Lilly $12,000 each year for 10 years,but payments cease upon Lilly's death.What are the tax implications of this proposition?
I.Lilly must recognize Gross Income when the money is received.
II.Frank has a deduction for Adjusted Gross Income in the year of payment.

A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Question

Frank and Lilly are negotiating a divorce settlement.Frank has offered to pay Lilly $12,000 each year for 10 years,but payments cease upon Lilly's death.What are the tax implications of this proposition?
I.Lilly must recognize Gross Income when the money is received.
II.Frank has a deduction for Adjusted Gross Income in the year of payment.
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A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Quizplus · Accepted Answer

Statement I is correct because Lilly must recognize the $12,000 payments as Gross Income when she receives them. 
Statement II is correct because Frank can deduct the $12,000 payments as an expense in the year of payment, as long as it qualifies as alimony for tax purposes. However, it is important to note that the payments must meet certain requirements to be classified as alimony, such as being made under a divorce or separation agreement and being intended for the support of the recipient spouse.

Frank and Lilly Are Negotiating a Divorce Settlement