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Pension Payment as Alimony


Dave T

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Picked up a new client recently who has been divorced for many years.

There were two components to the divorce decree., For the first two years $xxx per month.  Secondly he was required to give the ex-wife half of his military pension which he has done regularly.  ( The first component is long in the past so not an issue )   The question is whether the military pension is considered an alimony   Prior preparer did not take it as alimony but in my brief research I found a tax case in which it was allowed.

It is a fairly substantial amount which not only impacts this year but prior years if it is indeed considered alimony.

Any input is appreciated.

Thank you

Dave T

 

 

 

 

 

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If you've got a tax case, I think you could proceed with that.  Has he given a 1099-R to the ex for the half-pension amount?  Or paid the tax himself and given her half the proceeds (net of tax, one would hope)?

If he is required to pay it to her, there is a good case for him sending her a 1099-R, and subtracting that payment from his income (as a 1099-R correction, or as alimony).  Online places such as efilemyforms let you file a 1099-R online for a couple of bucks.

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In order for your client to deduct payments as alimony, the divorce decree must specify the amount to be considered "Spousal Support" or "Alimony."  Any other funds give to the ex are just distribution of marital assets.

Must be specific, and must say that the payments will continue until death.  It can also say" "Re-marriage or death", but the "until death" must be part of the requirements.

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I was just writing it up, if it's alimony it will be written as such in the divorce decree. I've never heard of dividing the pension and calling it alimony because she would lose her right to receive it if he died. The QDRO would guarantee her the benefit for HER life - not his. If nothing else, ask the divorce attorney.

 

Most states limit alimony to just a few years and instead divide assets to adjust accordingly.

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7 minutes ago, Jack from Ohio said:

"until death" must be part of the requirements

It can also be a specified number of years, so long as it is NOT linked to milestones of children (then it becomes child support).  I have seen alimony for specific numbers of years. 

I have also seen non-QDRO pension splits when the pension payer (state government, in the case I recall) does not allow re-apportioning (or naming) of benefits to an ex-spouse (and yes, then the payments end with the recipient's death, regardless of the other spouse's status).  As soon as I read "military" I made the same assumption.  That might not have been correct.

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If the person isn't able to receive Social Security benefits (teachers often times), their pension is not considered a marital asset and unable to be divided.

FYI - it's actually pretty rare that QDROs are completed. Attorney's hate to do them and clients usually hate the idea of paying thousands of dollars to get an asset they won't touch for years. I spoke with a divorce attorney who estimated he had over 100 of them in his files not completed because the clients had an outstanding bill sitting on the books. They can take 3-4 months to be completed, generate a legal liability to the attorney if not done correctly and clients protest paying for all the hours. People will have 3-4 accounts needing them and they'll only do the largest.

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15 minutes ago, Jack from Ohio said:

the divorce decree must specify the amount to be considered "Spousal Support" or "Alimony."

This is also not correct.  One of the requirements for payments to be alimony is that the divorce degree or separation agreement "doesn't designate payments as NOT alimony."

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1 minute ago, jklcpa said:

This is also not correct.

This may depend on state law.  Here in MA, they are really strict about what constitutes child support versus alimony, and it has to be spelled out in the decree.  The state will consider payments as child support if they can be tied in any way to child milestones, even if it is called alimony.  So decrees here tend to be *very* specific.

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12 minutes ago, Catherine said:

This may depend on state law.  Here in MA, they are really strict about what constitutes child support versus alimony, and it has to be spelled out in the decree.  The state will consider payments as child support if they can be tied in any way to child milestones, even if it is called alimony.  So decrees here tend to be *very* specific.

I also agree. Plus they specific alimony versus asset distribution because there are obvious tax consequences. Alimony in every case I've worked on is VERY specifically labeled as such.

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57 minutes ago, jklcpa said:

This is also not correct.  One of the requirements for payments to be alimony is that the divorce degree or separation agreement "doesn't designate payments as NOT alimony."

I disagree per IRS audit, and CP2000.  Dealt with this several times in the past, by taking the client's word about the amount of Alimony.  Please show me your cite?

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33 minutes ago, Jack from Ohio said:

I disagree per IRS audit, and CP2000.  Dealt with this several times in the past, by taking the client's word about the amount of Alimony.  Please show me your cite?

 

  • IRC sec 71(b)(1)(B), and
  • you could also look at Title 26 CRF 1.71-1T having Q&A and specifically look at #8, or 
  • if you need it in plain language, try topic 452 or Pub 504, pg 16 where each of those include the exact language that I stated.

I'd like to see your cites now in support of your position.

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Generally For military retirement divorce, the spouse pays the ex for a few months  and then the payment is made directly from DFAS (Defense Finance Accounting  Service). 

You will want to look at the Retiree Account statement.  This will show an amount deducted as FORMER SPOUSE DED.  it is on the right hand side of the page.

How long have they been divorced?  I have people who have been divorced for over 20 years and they are all paid directly from DFAS.  It would be very unusual for  him to still be paying her directly after the first few months. I'm not saying it can't happen, but it is not the norm.

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Case #2 A serviceman with the U.S. Navy divorced his spouse in 1993. The divorce decree required the serviceman to pay one-quarter of his naval retirement pay to his ex-wife under the Uniformed Services Former Spouses' Protection Act. He was also ordered to make child support payments and help pay medical and dental costs for each child.

When he retired from the Navy in 2000, the taxpayer began receiving retirement pay, but did not make any payments to his former-spouse as set forth in the divorce decree. However, after being compelled to do so by court order, he eventually made payments of $6,074 in 2002, some of which were for his children's uninsured dental expenses. The serviceman then deducted the entire amount as alimony on his federal tax return.

The IRS argued these payments did not qualify as alimony because part of it involved child support and the remaining portion was a property settlement.

But the Tax Court disagreed. Absent other terms in the agreement, the Court ruled that a portion of the payments constitute alimony if they would terminate upon the ex-spouse's death. In this case, the retirement benefits halt upon the death of the first spouse to die, so the serviceman would not be liable for payments to his ex-spouse's estate. The payments also met the other tax law requirements for alimony.

Result: Payments of $3,387 could be treated as alimony. {Proctor, 129 TC No. 12)

 

Above is the case I looked at to determine whether the one half of military pension is alimony.

A bit more background.  Client recieves payment directly to him montly ant then sends ex wife her half less 10% withholding as he receives the 1099-R from the government.

 

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If it's coming directly from the ex - it very likely is alimony.

JMO but if the receiving spouse were my relative I'd be upset that was the agreement. If he died, she's out of luck. She doesn't get spousal benefits as an EX.

I think Jack is right - Alimony ends at death or re-marriage and legally has to dictate that. If it continues after death, it isn't alimony.

Now child support and alimony like was also mentioned are co-mingled a lot and argued by the IRS. You can't end alimony in a certain period of time around the kid turning of age.

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5 hours ago, jklcpa said:

 

  • IRC sec 71(b)(1)(B), and
  • you could also look at Title 26 CRF 1.71-1T having Q&A and specifically look at #8, or 
  • if you need it in plain language, try topic 452 or Pub 504, pg 16 where each of those include the exact language that I stated.

I'd like to see your cites now in support of your position.

Audit and CP2000.  Direct conversation with the auditor, and the person at the IRS assigned to the CP2000 fiasco.  All three clients LOST, because of the lack of specificity in the divorce decree.

I will stick with what I have experienced.

Audit was in 2014.  CP2000, one in 2015 & 2016.

All it takes is for the recipient to not claim the income, or claim a different amount.  The payer of alimony always loses.

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Roberts, I have a retired teacher client and a piece of his pension is sent directly to his ex.  He said he was paying her and deducted it as alimony for a couple of years until I found out that she gets her own 1099R from the state for her portion.  This is a smart man but he couldn't get his head around the fact that because the amount isn't included in his taxable income he can't deduct it.  Maybe I should have taken the route that if she gets a 1099R and he also claims it, she'll have to pay tax on the money twice.  Clearly this was a division of his retirement assets at the time of divorce.  I've never heard of an individual issuing a 1099R.

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18 hours ago, Roberts said:

FYI - it's actually pretty rare that QDROs are completed. Attorney's hate to do them and clients usually hate the idea of paying thousands of dollars to get an asset they won't touch for years. I spoke with a divorce attorney who estimated he had over 100 of them in his files not completed because the clients had an outstanding bill sitting on the books. They can take 3-4 months to be completed, generate a legal liability to the attorney if not done correctly and clients protest paying for all the hours. People will have 3-4 accounts needing them and they'll only do the largest.

There are several attorneys in my small building (converted house) and they do a lot of divorces.  I hear them talk about QDROs all the time.  I can't speak for the defined benefit pensions, but for defined contribution account transfers, you definitely want a QDRO and a direct transfer.

 

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On 3/8/2018 at 7:41 PM, SaraEA said:

Roberts, I have a retired teacher client and a piece of his pension is sent directly to his ex.  He said he was paying her and deducted it as alimony for a couple of years until I found out that she gets her own 1099R from the state for her portion.  This is a smart man but he couldn't get his head around the fact that because the amount isn't included in his taxable income he can't deduct it.  Maybe I should have taken the route that if she gets a 1099R and he also claims it, she'll have to pay tax on the money twice.  Clearly this was a division of his retirement assets at the time of divorce.  I've never heard of an individual issuing a 1099R.

Is he eligible for social security? It is a law that if you aren't eligible for social security because your pay is exempt (because of the pension) that it isn't considered a marital asset anymore than Social Security (which isn't).

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On 3/9/2018 at 5:18 AM, Randall said:

There are several attorneys in my small building (converted house) and they do a lot of divorces.  I hear them talk about QDROs all the time.  I can't speak for the defined benefit pensions, but for defined contribution account transfers, you definitely want a QDRO and a direct transfer.

 

A QDRO on a defined asset plan (IRA or 401k type account) is rather easy and I've done many of those. The administrator has a form to achieve it. Defined benefit plans can be far more difficult and time consuming. A QDRO is a legal form which is involved in a current legal dispute so in most states a lawyer is required to be involved.

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On 3/9/2018 at 4:18 PM, Catherine said:

If you get money as nominee, you will need to send one or you pay taxes on someone else's money.

I just got one this year where the husband gets the 1099R for the full amount, even though the ex gets half. Thankfully no taxes were withheld. We issued 1099R from husband to ex.

Also, there poorly crafted mediation agreement says 500/mo until he dies but says nothing about qualifying as alimony or not qualifying. Too many lawyers suck at their job.

There was a MD case that went all the way to the state supreme court which, on a split decision, decided that lifetime payments ceased at remarriage because MD law clearly says they do. The ex got remarried one month after the divorce agreement. Alimony was rally high. I remember the surname in the case seemed appropriate.

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It was the Moore case (I think)

http://caselaw.findlaw.com/md-court-of-appeals/1132400.html

But, yeah, lawyers write vague agreements and then get paid to fight about what was meant for years afterward.

Tell your divorcing clients to SPELL. IT. OUT. Regardless of what the law says. I asked my mediation attorney why my divorce agreement didn't specifically say that support ended upon remarriage, and she told me that she felt it wasn't necessary because 'that was the law.' I told her she should start doing it.

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