Ralph and Renee are negotiating a divorce settlement that will be finalized in 2018. 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 32% marginal tax bracket, she should take the property settlement of $100,000.
II.If Renee expects that she will be in the 32% 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 that will be finalized in 2018. 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 32% marginal tax bracket, she should take the property settlement of $100,000.
II.If Renee expects that she will be in the 32% 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

Statement I is correct because alimony payments are taxable income, so Renee would only receive a net income of $8,160 per year ($12,000 minus 32% taxes). Therefore, the property settlement of $100,000 would be a better option if Renee expects to be in the 32% marginal tax bracket.

Statement II is incorrect because it does not take into account the time value of money. By receiving the $12,000 per year over 10 years, Renee will receive a total of $120,000. However, if she invests the $100,000 property settlement and earns a 5% rate of return, she would have approximately $163,000 in 10 years, which is significantly more than the alimony payments.

Ralph and Renee Are Negotiating a Divorce Settlement That Will