Husband (higher income in the 32% tax bracket) is contemplating filing for a legal separation or a divorce from Wife (lower income in the 12% tax bracket). Husband and Wife have two children, ages 10 and 12. Husband and Wife have agreed that Husband will pay Wife $3,000 per month for 11 years, or until wife remarries or dies. Husband will transfer his interest in the marital residence to Wife.
Husband and Wife have agreed that Husband will move into a small apartment above a detached garage so that he can be close to the children and help with them.
1. What are the tax consequences of this arrangement?
2. Should the divorce be deferred?
3. Would it matter if the divorce decree said that the payments will cease when the children graduate from college?
4. Does the result change if Husband moves into the basement? A spare bedroom?
5. What are the research questions?
6. Write a research memo discussing this issue.