A before tax basis but rafel will receive less than

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a before-tax basis, but Rafel will receive less than Alicia after taxes are considered. Under the plan, Rafel and Alicia would receive an equal before tax amount of $280,000. Rafel will receive assets with a fair market value of $410,000, but would incur a $130,000 liability to Alicia. As Rafel pays Alicia the $17,600 each year, the payments will not be deductible by Rafel as alimony (or included in Alicia’s gross income), unless they would cease upon Alicia’s death. Moreover, the interest on the obligation will not be deductible because it is not incurred in a trade or business or a transaction entered into for profit. Therefore, the after-tax interest rate on the loan is the same as the stated rate of 6%. The other property transactions will have substantial tax implications. Rafel’s basis in the investment assets will be $160,000. Therefore, if the investments were sold for their current value, Rafel would have a $250,000 ($410,000 − $160,000) taxable gain. Rafel would incur a $37,500 ($250,000 × 15%) tax
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liability. However, Alicia will not have any tax liability as a result of the proposed transactions because she does not intend to sell the appreciated asset she received, the personal residence. Even if she did sell the residence, the realized gain would be exempt from tax under the § 121 exclusion (see Chapter 15). 4-51. Pam retires after 28 years of service with her employer. She is 66 years old and has contributed $42,000 to her employer's qualified pension fund. She elects to receive her retirement benefits as an annuity of $3,000 per month for the remainder of her life. a. Assume that Pam retires in June 2015 and collects six annuity payments this year. What is her gross income from the annuity payments in the first year? b. Assume that Pam lives 25 years after retiring. What is her gross income from the annuity payments in the twenty-fourth year? c. Assume that Pam dies after collecting 160 payments. She collected eight payments in the year of her death. What are Pam's gross income and deductions from the annuity contract in the year of her death? Answer:
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8 × $200 = $1,600 exclusion) = $22,400

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