Claiming the Division of Military Retired Pay on Income Taxes
If finances in marriage life weren’t complicated enough, wait until you deal with military divorce taxes. Consider using popular financial software to help you stay organized, and consider the tax implications before you finalize your decree.
Sometimes in divorce negotiations, the term alimony will be introduced.
Sometimes, the service member thinks he or she will save on taxes if the division of military retired pay is referred to as alimony.
Calling Retirement Pay Alimony does not Save Taxes
Using the term alimony is incorrect and the concept of calling retired pay “alimony” to create tax-savings is also incorrect.
In some divorce cases, DFAS directly pays the former spouse’s division of pay. In such a case the service member and former military spouse will each receive an IRS Form 1099-R issued by DFAS. These Forms 1099-R should be reported as income received under Pension and Annuities on Federal Tax Form 1040 (line 16a for year 2012).
In other cases, such as our previously discussed Georgia military divorce, the service member makes payments directly to the former military spouse. In this case, only the service member receives a Form 1099-R and it is for the full amount (the service member’s and former spouse’s portion of retirement pay). As an equitable solution, the IRS permits these service members to claim the portion of military retired pay made to the former spouse as a deduction under alimony paid (line 31a on 2012 Form 1040). The spouse would in turn, claim alimony received on the Form 1040, line 11.
In both cases, the service member pays taxes ONLY on the portion of retirement pay received. There is no tax-savings by the service member directly paying the former spouse or referring to the retired pay division as alimony support.
The Dreaded IRS Mismatch Letter
When the division of pay is recorded incorrectly, there will be a mismatch with the IRS.
If the service member records the payment as alimony and the former spouse does not report it or records it as Pension income, the IRS will flag the tax return and ask for an explanation. It is important that the service member and former spouse are in sync when reporting military divorce taxes.
The Military Pension and Alimony
Using the term alimony in any discussion of military retired pay creates confusion.
As mentioned in prior alimony posts, it is important to understand that just because the IRS permits certain divorce cases to claim the division of pay as alimony, this does not make it alimony by definition.
The same hold’s true for the Pension and Annuities taxable income line on the 1040. Just because the military former spouse receives a 1099-R and claims it on this line, does not mean we should begin using the term pension to define military retired pay.
The division of military retired pay is a unique entity with rules and aspects that should keep it separate from being lumped in with the terms alimony and pension.
Be careful with the wording in your decree and be ready for the new challenges to keep your finances in order.
Have you ever received a notice from the IRS concerning military divorce tax issues? Tell us in the comments.