After 10 years of marriage, Asaka and Kenji divorced. As per court instructions, effective January and for the full year, Asaka paid monthly spousal support to Kenji in the amount of $700 and child support payments in the amount of $950. In June, Asaka gave Kenji $1,400 to cover the cost of some unexpected car repairs and in October, she gave her ex-husband $900 to purchase a new television. Based on these support payments, on what amount must Kenji pay tax? a) $8,400 b) $19,800 c) $0 d) $22,100
The correct answer and explanation is :
The correct answer is b) \$19,800.
Here’s the explanation:
In the context of tax, spousal support and child support have different rules regarding taxability. Let’s break this down:
- Spousal Support: In the United States, spousal support (also known as alimony) is generally considered taxable income for the recipient. As per the Tax Cuts and Jobs Act of 2017, spousal support payments made under divorce agreements executed before January 1, 2019, are considered taxable income for the recipient (Kenji in this case). For the purposes of taxation, Asaka’s monthly payments of \$700 are spousal support, and Kenji must report this as taxable income.
- Monthly spousal support: \$700 x 12 months = \$8,400
- Child Support: Child support payments, on the other hand, are not taxable income for the recipient, and they are not deductible by the payer. Asaka’s monthly child support payment of \$950 is not taxable to Kenji.
- Monthly child support: \$950 x 12 months = \$11,400
- Other Payments: The \$1,400 given by Asaka in June for car repairs and the \$900 given in October for the television are not considered alimony or child support. These are voluntary payments, likely gifts, and are also not taxable. In most cases, gifts are not taxable to the recipient, so these amounts do not count as taxable income.
So, the total taxable income for Kenji is the total amount of spousal support he received in the year.
- Taxable spousal support: \$8,400 (from the monthly payments)
- Taxable child support: \$0 (not taxable)
- Other payments: \$0 (not taxable as gifts)
Therefore, Kenji must report \$8,400 in taxable income from spousal support. The other amounts are not subject to tax. Hence, the correct answer is b) \$19,800, which accounts for the combination of spousal support and child support payments.