Al and Peggy divorce in 2018. As part of their 2018 divorce agreement, Peggy is to pay Al $70,000 for his share of their home (the home's fair market value is $140,000) . Also, Peggy agrees to pay Al $1,000 monthly. The payment represents the financial support for their 15-year-old son, Bud. It will cease upon Bud's 23^rd birthday or college graduation-whichever comes first. Which of the following explain(s) the tax effects of these events?
I.Peggy can deduct $12,000 annually for the monthly payments made this year.
II.Al does not recognize the $1,000 monthly payments as income.

Question

Quizplus · Accepted Answer

Statement II is correct. Al does not recognize the $1,000 monthly payments as income because they are considered child support payments, which are not taxable income to the recipient. 
Statement I is incorrect. Peggy cannot deduct the $12,000 annual payments as they are considered child support payments and are not deductible for tax purposes.

Al and Peggy Divorce in 2018