Former Military Spouse Pay on Income Tax Returns
Military Divorce Alimony and Taxes
We recently revised discussion on the case of Proctor vs the IRS and military divorce alimony. One of our goals was to break the original article down into bite size pieces of understandable information. This is a follow-up to that discussion.
In the Proctor case, the service member (as opposed to DFAS) was directly paying the former military spouse the court ordered division of retired pay. The judge ruled that a service member directly paying a former military spouse could claim this amount paid as an alimony deduction on the IRS Form 1040.
In cases such as this, the former military spouse would then claim this same amount as alimony received. We already pointed out that this is fair and equitable — although technically not correct because the division of pay is property (not alimony).
Alimony, Military Divorce, and IRAs
When the IRS made this ruling, did they considered the other aspects of alimony? Specifically Alimony and Individual Retirement Accounts (IRAs):
Taxable alimony and separate maintenance payments received by an individual are treated as compensation for IRA purposes.
Essentially, alimony counts as income eligible for IRA contributions. Ex-spouses receiving alimony can take this money and contribute it to an IRA.
The Proctor case ruling, together with the IRS policy concerning IRA’s, permits a former military spouse in this situation (where the service member directly pays the ex-spouse and the ex-spouse claims this payment as alimony) to use military retired pay to qualify to contribute to an IRA.
This is great news for an unemployed former military spouse who receives a direct payment from the service member. Normally, an unemployed spouse is not eligible to take advantage of the tax benefits gained from contributing to an IRA, but an unemployed spouse receiving alimony CAN.
But, What about the Rights of the other Former Military Spouse?
What about the other former military spouse — the one who receives the division of pay directly from DFAS? DFAS issues a Form 1099-R. Can this spouse record the 1099-R figure on the alimony received line of the Form 1040 and also qualify for an IRA contribution?
No.
If a 1099-R figure is recorded as alimony received, this would create an IRS Mismatch because the service member is not reporting the same amount as alimony paid. (Not to mention that DFAS is also reporting the 1099-R to the IRS and this will cause the IRS to look for the amount on Form 1040 Line 16a, Pensions and Annuities.)
How can they let one former military spouse qualify for an IRA and not the other when it’s the same “pay” but simply distributed in a different manner?
That’s not fair. (Here’s another inconsistency in military divorce. 🙂 )
And, what about the service member? The service member is in the same situation as the “other” former military spouse. A 1099-R is received. So, the service member is also unable to use military retired pay to count for IRA eligibility.
It seems when it comes to government proposals, lawyers, judges, and court cases, that often the left hand does not talk to the right and the brain (whoever is supposed to the final decision maker in all of this) — at times controls nothing at all.
But, discussing issues like this should help readers understand the complexity of the USFSPA, that there are many issues connected to it and it’s not so simple to just say, “Change the law please.”
For now, if you’re a spouse who has to deal with payments from your ex, instead of receiving payments from DFAS, at least you can consider yourself lucky from one aspect. You have an opportunity to invest your portion of the division of military retirement pay in an IRA.
We suggest you look into the ROTH IRA. Get some software to organize your finances, take advantage of tax benefits, and maybe you can have a vacation projected in your future.
I live in Lousiana, which is a tax exempt state for military. I divorced my ex and I am receiving half of his retired pay. I have a code 7 on my 1099R. He lives in North Carolina in which he pays state tax. I contacted DFAS to take out state La. taxes out of my portion of his pay. They replayed that they dont have the means to do this. Why can I not claim tax exempt on my LA. Tax filing?
Yes, the USFSPA performs “judicial alchemy” on military retired PAY to “magically” transform it into “property” for division, then, it re-becomes TAXABLE INCOME to the former spouse. The IRS didn’t make the ruling – the US Tax Court made the ruling – !
Back in early 1991, DFAS asked the IRS to resolve the “who pays the income tax on court ordered former spouse payments. The IRS told DFAS to use IRS Form 1099-R to report BOTH retiree and former spouse payments as separate income to each.
As you have observed and documented some of the MANY conundrical dichotomies of the USFSPA, it’s “awesomely” refreshing to hear from a former spouse that even voices those findings without the usual vitriolic and self-centered anger of fighting for “their earned military pension” !
Bottom line – the USFSPA may be legal, but it damn sure is NOT moral !
LEt’s look at one of the USFSPA’s preventions –
10 USC 1408(C)(2) which states that former military spouses may NOT have their property payments considered as retired pay for service in the uniformed services. Therefore those military spouses are criminally evading legally owed state income tax by taking the full or partial state income tax exemption that is for genuine military retirees in the 30 states that offer this state income tax privilidge. Former military spouses – BEWARE ! the 30 states have been put on notice and will be auditing your state income tax returns for state income tax FRAUD !