Question
1. Alimony recapture . Dave and Sue's divorce became final on January 2 of the current year. Dave is an executive for a Fortune 500
1.Alimony recapture. Dave and Sue's divorce became final on January 2 of the current year. Dave is an executive for a Fortune 500 company and Sue is starting her own business this year. In the current year (year 1 of the divorce agreement), Dave expects his marginal income tax rate to be 35% and Sue's marginal income tax rate will be 25% because of some start-up expenses of her business. Two years from now (year 3 of the divorce agreement), Dave will retire and will be in the 15% tax bracket, and Sue's business, a sole proprietorship, will cause her to be in the 35% tax bracket. Dave intentionally front-loaded his alimony payments to Sue ($60,000 in year 1, $40,000 in year 2, and $20,000 in year 3). What is Dave's alimony recapture in year 3? Formula: R3 = P1 + P2 -2P3 - $37,500 (2 points)
Dave's Tax Rate in Year 1: 35%
Sue Tax Rate in Year 1: 25%
Dave's Tax Rate in Year 3: 15%
Sue Tax Rate in Year 3: 35%
Alimony payments in Year 1: $60,000
Alimony payments in Year 2: 40000
Alimony payments in Year 3: 20000
P1=$60,000-(35/100*$60,000+15/100*$60,000)=$30,000
P2=$40,000-(35/100*$40,000+15/100*$40,000)=$20,000
P3=$20,000-(35/100*$40,000+15/100*$20,000)=$10,000
R3=$30,000+$20,000-2*$10,000-$37,500
=$7,500
Would this calculation be correct, or do the tax rates remain irrelevant to the calculation? Why do i need to include the tax rates in the calculation?
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