Military Spouse Alimony - A Georgia Divorce IRS Case
Proctor v. Commissioner of Internal Revenue, TC 12 – Tax Court 2007
We've been discussing whether military retirement pay should be viewed as property or alimony and how our viewpoint influences our opinions concerning the USFPSA and treatment of military retirement pay.
Let's look at a case where a service member married in Georgia took the IRS to court over the issue of claiming former spouse payments as alimony on tax returns.
In the case of NEIL JEROME PROCTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent (Docket No. 2813-06. Filed October 10, 2007), a judge concluded this concerning military retired pay division and alimony tax deductions:
"[the requirements of alimony for IRS purposes] will generally be met if there is no “clear, explicit and express direction” in the divorce decree stating that the payment is not to be treated as alimony." see source
This case involved Neil Jerome Proctor (the petitioner) who had served in the U.S. Navy and divorced his wife Ms. Liza Holdman. He petitioned the courts to allow him to deduct the former military spouse payments as alimony on his taxes.
From the source article, we learn that:
Proctor (service member) and Holdman (spouse) were married in 1979.
The final judgement decree of divorce was issued in 1993 (after roughly 14 years of marriage).
Proctor was active (in service) in 1993, the year of divorce.
Proctor retired from service in 2000.
Proctor was paying Holdman her portion of the divided retired pay (as opposed to DFAS paying).
We see in the source document many side issues of: child support, refusals to pay, why the figure used for the division of pay was reduced, questions surrounding tax references, and no statement as to whether there was a ten year overlap of service and marriage. (You can learn more about military divorce issues in the book, Military Divorce Tips.)
We're only going to focus on accounting for the division of military retired pay on taxes.
Current 2012 IRS rules on deducting Alimony state:
Amounts paid under divorce or separate maintenance decrees or written separation agreements entered into between you and your spouse or former spouse will be considered alimony for Federal tax purposes if:
You and your spouse or former spouse do not file a joint return with each other
You pay in cash (including checks or money orders)
The payment is received by (or on behalf of) your spouse or former spouse
The divorce or separate maintenance decree or written separation agreement does not say that the payment is not alimony
If legally separated under a decree of divorce or separate maintenance, you and your former spouse are not members of the same household when you make the payment
You have no liability to make the payment (in cash or property) after the death of your spouse or former spouse, and
Your payment is not treated as child support or a property settlement
Not all payments under a divorce or separation instrument are alimony. Alimony does not include:
Noncash property settlements
Payments that are your spouse's part of community property income
Can Former Spouse Payments be Deducted as Alimony?
The short answer is:
Yes, when the service member directly pays the former spouse the division of retired pay.
No, when DFAS directly pays the former spouse portion of divided retirement pay
But, the "Best Solution" is Not Necessarily the "Correct" Solution
The problem with permitting division of pay to be claimed as alimony is simple:
Division of Retirement Pay is NOT alimony.
By using the USFSPA law, any court order declaring a division of pay automatically declares the division property (as defined in the law itself).
However, when the service member is paying the former spouse (as in Proctor's case), the service member receives a Form 1099R from DFAS for the entire amount of retirement pay. It is unfair for the service member to shoulder the burden of paying taxes for ALL the retirement pay when a portion is given (by Proctor) to the former spouse. (Remember DFAS is not paying her.)
So as ruled in this case, Proctor is permitted to claim the portion paid on his taxes as alimony.
This is the best solution at the moment, because there is no other tax line to make the claim.
The correct solution would be to avoid using the alimony tax deduction altogether by requiring DFAS to always pay the former military spouse; not just in cases of ten year marriage/service overlap. (Learn more in the book: Military Divorce Tips]) (If eligible, the DFAS payment is the recommended choice in Military Divorce Tips.)
But when you have a judge with a case where the service member is paying the former military spouse, and these ex-spouses want an immediate answer, the "best solution" is a fair and equitable decision to use the alimony line of the tax return. The service member is satisfied because the deduction is claimed, and the former military spouse feels no monetary impact because claiming receipt of alimony or claiming receipt of retirement pay — both fall under the income received portion of the IRS Form 1040. It appears the former spouse's taxes would be unchanged.
However, this equitable solution causes confusion because people begin to associate the division of military retirement pay with alimony support.
Just because the division of military retirement pay can be claimed as alimony under certain circumstances, does not mean you can now define the retirement pay as "alimony support."
*We'll discuss more aspects of alimony and raise issues concerning using the alimony deduction line of the IRS 1040 tax return in follow-up posts.*
More on Alimony
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