Ralph and Renee are negotiating a divorce settlement.Renee has an option of taking a property settlement of $100,000 or alimony payments of $12,000 per year for 10 years.Without considering the time value of money,which of the following statements is true?
I.If Renee expects that she will be in the 25% marginal tax bracket,she should take the property settlement of $100,000.
II.If Renee expects that she will be in the 25% marginal tax bracket,she should take the alimony of $12,000 per year for 10 years.

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

Question

Ralph and Renee are negotiating a divorce settlement.Renee has an option of taking a property settlement of $100,000 or alimony payments of $12,000 per year for 10 years.Without considering the time value of money,which of the following statements is true?
I.If Renee expects that she will be in the 25% marginal tax bracket,she should take the property settlement of $100,000.
II.If Renee expects that she will be in the 25% marginal tax bracket,she should take the alimony of $12,000 per year for 10 years.
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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

If Renee takes the property settlement of $100,000, it is considered a capital gain rather than taxable income, so she will not have to pay taxes on it. However, if she takes the alimony payments of $12,000 per year, it is considered taxable income, and she will have to pay taxes on it at the marginal tax rate of 25%. Therefore, statement I is correct, and statement II is incorrect.

Ralph and Renee Are Negotiating a Divorce Settlement