Taxes and military pensions are not simple subjects; they require understanding alimony and income — and tax issues specific to military pension garnishment.
By Mark E. Sullivan, Family Lawyer
In a military divorce case, the nonmilitary spouse is often concerned about pension-share payments and taxes. They will invariably want to receive pension division payments direct from the retired pay center – which for the Army, Navy, Air Force and Marine Corps is the Defense Finance and Accounting Service (DFAS) in Cleveland, Ohio. Pension garnishments for the Coast Guard and the commissioned corps of the Public Health Service and of the National Oceanic and Atmospheric Administration are handled by the Coast Guard Pay & Personnel Center in Topeka, Kansas.
Taxes and Military Pensions: Direct Payments When Possible
In the usual case, attempts to get the hypothetical servicemember, Colonel John Doe, to write a monthly pension-share check to his ex-wife once he has retired may be an exercise in futility. Suppose he retires in another state, or what if his retirement residence is in Germany or Japan? If he retires elsewhere, or if he insists on moving around from place to place, it will be virtually impossible for the former spouse to collect her share each month.
Direct pension payments by garnishment would benefit Colonel Doe as well as his ex-wife. He should 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 does she) a Form 1099-R each January showing what the taxable income is for the prior tax year. He doesn’t need to keep track of writing a check every month to send to his former spouse.
When Direct Payments Are Not Possible
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 [1]. In addition, there will be another gap of up to 90 days at the start of the pension garnishment process to account for the review and processing of the military pension division order (MPDO) [2]. What good guidance can be given to Colonel Doe and his former wife in these situations?
Taxes and Military Pensions: Good Guidance Needed
Divorcing military personnel cannot expect the necessary guidance from most lawyers. Few of them know enough about the tax consequences of periodic payments from the former employee to the alternate payee in regard to the division of a deferred compensation program. One premier family law attorney, when asked why she’d told her client there were no taxes due for the receipt of monthly pension-share payments from a Navy retiree, replied, “Because the payments are part of property division, not alimony, and everyone knows that property division payments are not taxed under Section 1041 of the Internal Revenue Code.” It is, of course, true that property transfers between spouses under 26 U.S.C. 1041 are not subject to capital gains taxes, but this has no relationship to the issue at hand, which is pension-share payments from a military retiree to a former spouse.
Don’t expect guidance from appellate decisions in domestic cases involving pension division. When higher courts mention tax aspects of pension division payments – which happens rarely – they usually get it wrong. Two state court decisions, from the highest court in each state, approved of the division of the pension payment received by the retiree less taxes for the proper distribution of marital retirement benefits upon divorce [3]. The Utah Court of Appeals in 2012 ruled that the military pension should be divided after the deduction of federal and state taxes [4]. In 1995, the Superior Court of New Jersey, Appellate Division reviewed without criticism or comment a trial-level judgment for military pension division that allocated “the Husband’s retirement pension less only Federal, State, or local Income Taxes properly withheld required by law” [5].
In a 2011 decision, the Kentucky Court of Appeals affirmed a trial-level order which required the retiree to “withhold from the retirement benefits otherwise payable to [the former spouse] a sum sufficient to pay all taxes imposed on [the retiree] for that portion of his retirement” [6].
A rare exception is found in Brown v. Brown, a 2010 trial-level decision from Connecticut [7]. At the end of the decision, the judge wrote that “the court is under the assumption that the plaintiff [the retiree] will be able to deduct the full amount of that payment from his 2010 income tax return and the defendant [the former spouse] will be required to pick up that full payment on her 2010 income tax return” [8].
How to Do It Properly
The Brown decision illustrates the correct approach. When the pension is divided in a written instrument and the payments end no later than the death of the payee, the military retirement payments are includable in the gross income of the payee and are excludable from the payor’s income. A Tax Court case in 2000 confirms this: in Baker v. Commissioner [9], the ex-husband was a military retiree. He was ordered in the divorce decree to pay his ex-wife 50% of his military retired pay each month as part of property division. He made payments to her and deducted these as alimony on his Form 1040; his ex-wife did not report the payments as income, claiming that “the payments she received […] were in furtherance of a division of property and should be excluded from her income” under IRC Section 1041. The Tax Court ruled against her, stating that:
- IRC Section 61 defines gross income as all income from whatever source, including alimony;
- Whether a payment is alimony is determined by reference to Section 71;
- Section 71(a) states that any amount received as alimony is included as income;
- 71(b)(1) defines alimony as payment under the following terms –
- Any cash payment;
- Received by a spouse under a divorce or separation instrument;
- Which doesn’t designate the payment as non-includable within gross income under Section 71 and non-deductible under Section 215;
- The parties are not members of the same household when the payment is made, and;
- There is no liability to make any payment after death of the payee spouse.
Thus, if a payment satisfies all of these factors, it is alimony. Here the Tax Court found that the direct payments from the retiree to his ex-wife were alimony (as the tax rules define it), even though intended as property division, and they were includable in the ex-wife’s gross income.
The Baker case is not unique. Numerous other cases make the same point – the periodic pension-share payments made from a retiree to former spouse are included in her income and excluded from his [10].
When the retired pay center does not make direct payments to the former spouse, Colonel John Doe will need to make the payments to his ex-wife directly. He will have tax withheld on the entire amount he receives. He can exclude from his income any amount he paid to her pursuant to the decree or agreement. His ex-wife 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,” and as a negative at Line 16a, “Pensions and annuities,” or at Line 31a, “Alimony paid” [11]. He should attach to the tax return an explanatory note, along with appropriate documents to back up his position.
What about income for the recipient? John Doe’s ex-wife will complete her own Form 1040 showing the payments she received from Colonel Doe pursuant to a written instrument, which are the division of the defined benefit program. She would reflect the gross amount paid to her by John under “Pensions and annuities,” which is line 16a.
To cover these contingencies, consider a clause in the court order or settlement document that says:
Periodic payments made by Husband directly to the Wife which are not done by garnishment through the military retired pay center will be included in Wife’s income under Sections 61 and 71 of the Internal Revenue Code, and these payments are likewise excluded for Husband from his gross income.
At the end of this paragraph, the drafting attorney may choose to insert the citations shown herein as authority for this clause.
State Income Taxes
While military retired pay is always subject to federal income taxation, one should not make the same conclusion in regard to state taxation. The states of Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming have no individual income tax, while New Hampshire and Tennessee only tax income derived from interest and dividends. Of the remaining states, about 16 have special rules for exemptions regarding military pensions. North Carolina, for example, grants a full exemption for retired military personnel who have five years of service as of August 12, 1989 and otherwise there is a deduction of up to $4,000 (for joint tax filers, the limit is $8,000). The chart at Appendix 1 showing the special exemption rules is taken from www.military.com.
Attorney Fees
On a related tax note, a former spouse receiving or trying to get a share of military retired pay should always be advised about the possible deduction of 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 [12]. The former spouse should ask her tax preparer whether this is a deductible expense and, if so, how much may legitimately be claimed as a deduction.
Appendix 1: States with Special Military Retirement Pay Exemptions
The following States have special provisions for military or public pensions:
| Alabama | Hawaii | Illinois |
| Kansas | Kentucky*** | Louisiana |
| Massachusetts | Michigan* | Mississippi |
| Missouri++ | New Jersey | New York |
| North Carolina+ | Ohio | Pennsylvania |
| Wisconsin |
* Exempts USPHS and NOAA retired pay as federal employment.
*** Exempt depending on date of retirement prior to 1998; after this date, some may be exempt.
+ NC allows full exemption for retirees with five years of service as of August 12, 1989; otherwise a deduction of up to $4,000 ($8,000 for joint filers) is allowed.
++ Missouri has a Public Pension Exclusion that covers a portion of pension income.
[1] 10 U.S.C. § 1408 (d)(2).
[2] Id.
[3] Hodgins v. Hodgins, 126 N.H. 711, 716, 497 A.2d 1187, 1190 (1985); Majauskas v. Majauskas, 61 N.Y.2d 481, 487-88, 474 N.Y.S.2d 699, 702, 463 N.E.2d 15, 18 (1984).
[4] Johnson v. Zoric, 2012 UT App. 22, ¶22-23, 270 P.3d 556 (2012), aff’d in part Johnson v. Zoric, 2014 UT 21, 330 P.3d 704 (2014).
[5] Torwich v. Torwich, 282 N.J. Super 524, 525, 660 A.2d 1214 (1995).
[6] Guest v. Smith, 2011 Ky. App. Unpub. LEXIS 913 at *5, 2011 WL 6412065 (2011).
[7] Brown v. Brown, 2010 Conn. Super. LEXIS 1348; 2010 WL 2698272 (2010)
[8] Id. at *14.
[9] Baker v. Commissioner, T.C. Memo 2000-164.
[10] Pfister v. Comm’r, 359 F.3d 352 (4th Cir. 2004), aff’g. T.C. Memo. 2002-198; Proctor v. Comm’r, 129 T.C. 12 (2007); Mitchell v. Comm’r, T.C. Summary Opinion 2004-160; Weir v. Comm’r, 82 T.C.M. 281 (2001); Mess v. Comm’r, T.C. Memo 2000-37; Eatinger v. Comm’r, T.C. Memo 1990-310.; and Lowe v Comm’r, 42 T.C.M. 334 (1981).
[11] See, e.g., Bruce M. Bird and Marcia Sakai, “Structuring Payments as Deductible Alimony” The CPA Journal (New York Society of CPAs), August 2008.
[12] Reg 1.162-2(b)(7): “Generally, attorney’s fees and other costs paid in connection with a divorce, separation, or decree for support are not deductible by either the husband or the wife. However, the part of an attorney’s fee and the part of the other costs paid [by the wife] in connection with a divorce, legal separation, written separation agreement, or a decree for support, which are properly attributable to the production or collection of amounts includible in gross income under section 71 are deductible by the wife under section 212.”
Mark Sullivan is a retired Army Reserve JAG colonel, practicing family law in Raleigh, North Carolina. He is the author of The Military Divorce Handbook (Am. Bar Assn., 2nd Ed. 2011). A Fellow of the American Academy of Matrimonial Lawyers, Mr. Sullivan has been a board-certified specialist in family law since 1989. He works with attorneys and judges nationwide as a consultant and an expert witness on military divorce issues in drafting military pension division orders. www.ncfamilylaw.com.
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14 Comments
Ce Curts
After this article was posted, DFAS changed their address from Cleveland to Indianapolis as follows:
Defense Finance and Accounting Service
U.S. Military Retired Pay
8899 E 56th Street
Indianapolis IN 46249-1200
Joe Yuna
Unfortunately, when this Act was passed, several states like Virginia automatically made the proportion due to the ex-spouse non-negotiable. Now with the new tax code, if DFAS makes these same payments while the member does not by check or cash, does this income not qualify as alimony? And then what is it – spousal support therefore she is a dependent if the income received is larger than her own earned income? Did anyone in Congress or the military defend what little we receive while other benefits were eroded under Clinton?
Judith Bittikofer
I want to know why a retired military member was 100% disabled under the VA and I was unable to touch his pay. I understand that but want to know why I was awarded a portion of his retired pay when he started receiving it and then the government stopped it and I had to pay back $8,000. I want to know why? This is his retired military pay and has nothing to do with disability pay. When I checked years ago I was told he had the option for me to receive it or not and he said he didn’t want me to receive it. You all have a copy of the divorce where it says I get a portion of his retired pay cause we were married 24 years could you please give me an explanation as to why?
msjudy63@yahoo.com
kevin
Wow, so sad you spouse is 100% disabled and you’re trying to go after his VA benefit. Military personnel need more protection by the laws of this country we got to war to protect.
Greg
@Judith Bittikofer
To answer your question, your former spouse payments are made from his ordinary retirement, NOT from any amounts he receives as disability payments.
So when or if he becomes 100% disabled, ALL of his monthly retirement payments are NOW disability payments, meaning you now get $0. Because as I mentioned, what you were receiving were payments from his ordinary retirement. And it is a % of his retirement (not including any disability).
Furthermore, this entire former spouse protection law is the biggest load of crap I’ve ever had to go through. What makes you or any ex-spouse entitled to our retirement after divorce until we die! This law should have NEVER been passed the way it was. It SHOULD have been written that you only receive those payments for the same amount of years that the calculations were performed to say how much you get each month. For example, if you were married for 10 years while he was on active duty, they use those 10 years to calculate the monthly payment. And the law should have said that you only are able to receive those payments for the same 10 years, then they STOP! The whole law is ridiculous. I mean these payments are considered Alimony IAW the IRS, and typically Alimony stops when the ex-spouse remarries. But under this stupid law WE (the military retiree) are screwed for life! Bunch of BS!
Kelly
Greg, I feel ya. 🙂 There is certainly some further discussion that needs to be had on this issue. Sad thing, if you realize it, is that this all came about because of a retiring admiral who had affections for his assistant…
C
You are rude. Half of the military wouldn’t even make it to retirement without their military spouses. When you retired, if you were married, she retired too. Don’t get me started on if I had to raise your children from a former marriage! I am glad the law has changed. We deserve it. Suck it up and show respect for us as former spouses! Pay up!
AJ
Ha! Are you joking “C”? If “half the military wouldn’t even make it to retirement”? How would you explain those who are single and do just fine. Wow, you really drank the kool aid. A military spouse is not some special snowflake, you didn’t “serve too”, and all the other garbage you were fed. I must be some sort of fu**ing unicorn. Duel military (I’m a reservist) 2 kids, full time job, home owner, husband that’s AD and deploys. Geez how is that possible!?! When I was doing areomeds out of Balad, I didn’t see any military spouses on that plane!?! Did I miss you? You must have been in the plane behind us? If you want the benefits, join the military and see how hard it really is, I know an excellent recruiter that can hook you up. SMDH. Quit with your BS of you serve too. You cheapen the Veteran, especially the female veterans experience when you say that. Raising kids and paying bills is called being an adult.
T.O.G
Good discussion. I was raised by strong, solid parents, and was always taught to make sure I could always handle my own bills, and navigate through life, without the assistance of anybody. I see alimony as a crutch for ex-spouses, and I don’t agree with it. I will be paying out a % of my retirement once my ex completes the necessary paperwork, and I have also been paying child support and for a period of time, alimony. There are a few differences though, if you have paid alimony and child support, you know what they are. If you pay child support, there are exactly 0 tax breaks, rightfully so. You had a child with your ex-spouse, and you are responsible for that child, so you pay, and you pay until that child is 18. However, if you pay alimony, to a grown adult who may or may not be working, I see that as an unnatural way to receive money. The punishment for the ex-spouse is that individual receives some tax penalties, and the benefit to the payee is that person gets some tax breaks and a nice increased tax return.
So, deserving a retired military members pay…would definitely not put it that way. If that person deserved that money, it would come with no strings, no tax penalties, and no extra paperwork to be completed. Before my divorce became final and the court made its judgement, I had already been paying my soon to be ex-wife what the child support calculator on childsupport.ca.gov identified. However, I did not include alimony, because the adult should be able to figure out a way to handle bills, and navigate through life.
Harry Newman
As part of a property settlement, my daughter was awarded 39% of her retired husband’s military pension. Since the law has changed regarding taxability of divorce settlements, is her portion taxable income? The money is paid directly to her by the government but it still is essentially paid to him and then he authorizes the government to pay it to her. Isn’t this covered under the latest tax law revisions? Any information that you can provide will be deeply appreciated.
Mark Sullivan
While there were changes in the taxability of alimony in the Tax Cuts and Jobs Act, nothing changed regarding the taxation of pension-division payments. When such payments are made according to the IRS rules and are incident to divorce, the recipient is charged with taxable income and the payor may exclude payments made from his/her taxable income.
The money is paid directly to her by the government but it still is essentially paid to him and then he authorizes the government to pay it to her.
It’s unclear whether this means that:
If it’s the former, then the payments are being made to him and he’s indeed authorized the govt. to make payments to her. There are two problems here – A) the voluntary allotment can be stopped as easily as it can be started; there is no guarantee of continuity of payments. And B) I’ve NEVER seen an allotment which took into account annual COLA’s [cost-of-living adjustments], and that can be a substantial financial issue. Every December, when there is a COLA, it’s applied to the pension of a military retiree. Does the former spouse get a share? The answer is YES except when the pension division calls for a fixed dollar amount [e.g., Jane Doe gets $500 from John Doe’s retired pay”]
If it’s the latter, then COLAs are applied automatically, and each party receives a Form 1099-R each January to account for payments made to each one.
Isn’t this covered under the latest tax law revisions?
No – the new law made no changes in this area.
Joe-san
My question is on federal taxes. I am retired military, divorced, and ordered by the court (divorce decree) to pay my ex-wife 43% of my retired pay and alimony. The divorce decree directed my ex to get her DFAS account so she could receive her share of my retirement directly from DFAS. It also directed me to pay her directly the amount of her share of my retirement pay until her account was established. Once started, her payment from DFAS would be taxed (both state and federal) and she would receive a 1099-R each year to use when she files taxes. She has not sent the paperwork to DFAS to start her account and I just pay her every month by transferring money to her checking account. My question is this: Since I have been paying her directly and she has been receiving a tax-free payment from me, can I claim this money when I file my taxes as a deduction (alimony) and report the amount as income for her. She is really getting over because I’m being taxed on the money I transfer to her but it’s tax-free to her unless I can claim it as a deduction.
Mark Sullivan
This is very complicated, and you should consult with a CPA who is experienced in divorce taxation to obtain a correct result and competent advice.
Here are some general points about taxes for the recipient and the exclusion of pension-share payments for the payor, in regard to a “defined benefit plan” (such as military retirement under Chapter 71 of Title 10, U.S. Code).
Please note that these points (above) may or may not apply to your unique situation; for legal advice, you must seek advice from an experienced attorney.
CJ Wallington
My problem is relatively cut and dried, with the exception of “how”. Divorced in Virginia after 23 years of service; we married early (but not at start) of the career. Court awards 43% of pension starting from date of divorce. I have to pay the 43% directly to her for three months until the paperwork catches up and DFAS pays her directly (and withholds taxes from her portion). All good so far.
I receive 1099-R at the end of the year for the full amount of the pension but I should only be responsible for the amount that I retained (pension – disbursement = taxable amount).
Researching the IRS rules shows that I am allowed to issue her a 1099-R, showing the total amount paid, but none withheld as I was not allowed to withhold. So tax due on disbursed amount is her obligation (reinforced by IRS code).
QUESTION – where do you show the 1099-R to her as an expense on my 2019 Form 1040? While the total amount disbursed is not huge (about $6k) it makes a big difference on my return as it reduces my taxable income AND drops me into a lower tax bracket. Net change is about $2.8k in my favor on the refund as I’ll be able to recover more of the withholding.