In a military divorce case, the nonmilitary spouse will often be concerned about pension share payments and taxes. She will invariably want to receive pension division payments direct from the retired pay center.
In the usual case, attempts to get the hypothetical servicemember, Col. Smith, to write a monthly pension share check to his ex-wife once he has retired may be an exercise in futility.
Direct pension payments by garnishment benefit Col. Smith as well as his ex-wife. He needs to know that, with a garnishment, the military does the appropriate withholding before sending out checks. The ex-wife’s share of his military pension is automatically excluded from his taxable income. He receives (as she does) a Form 1099-R each January showing what the taxable income is for the prior tax year. He does not need to keep track of writing a check every month to send it to his former spouse.
But sometimes it is not possible to obtain payments through the military retired pay center. Pension garnishment payments for property division cannot be made through the pay center when there is not a 10 year overlap of the marriage and the period of creditable service. In addition, there will be another gap of up to 90 days at the start of the pension garnishment process, to account for review and processing of the military pension division order (MPDO).
What guidance can be given to Col. Smith and his former spouse in these situations?
When the retired pay center does not make direct payments to the former spouse, Col. Smith will need to make the payments to his ex-wife directly. He will have tax withheld on the entire amount that he received. He can exclude from his income any amount he paid pursuant to the separation agreement. His former spouse is liable for taxes on the share of the pension that she received, and she should include the payments in her gross income.
How is this done? The payor’s payment may be entered as a negative number on the face of Form 1040 at line 21 as “Other income,” as a negative at line 16a, “Pensions and annuities,” or at line 31a,” Alimony paid.
Col. Smith’s former wife will complete her own Form 1040 and this would show the payments which she received from Col. Smith. She would reflect the gross amount paid to her by her former spouse under “Pensions and annuities,” which is line 16a.
On a related tax note, do not forget about the possible deduction for legal fees for work done on obtaining a portion of the military pension. After all, the pension payments are taxable income for the former spouse. And the legal work was done, and fees paid, toward the production of taxable income.
Contact the Law Offices of Renee Lazar for a free one hour consultation to discuss your situation.