Is “Former Military Spouse Retirement Pay” Alimony?
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:
- Child support
- Noncash property settlements
- Payments that are your spouse’s part of community property income
- Payments to keep up the payer’s property, or
- Use of the payer’s property
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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I’m still not ckear. If the husband retires after 21 yrs of service and divorces in the state of Florida after shortly 10 yrs of marriage. Does he claim on his taxes the full amount of retirement or only the leftover after the deduction paid through DFAS? Nothing on the divorce papers say that this is alimony. Please advise.
Retirement pay can be claimed as alimony when the service member DIRECTLY pays the former spouse the division (or a portion of the division) of retirement pay. In the case you describe, it sounds like DFAS is paying part and the husband is paying the remaining portion. In such a case, the husband could claim the part he pays to the spouse as Alimony and then the spouse would also record the amount on her taxes.
This does not mean it is “Alimony.” Just as you mention, there is no alimony in the decree. But the IRS does not have a line for “taxable military retirement pay,” so using the “Alimony” line to record what happens is fair to both parties.
*This is not legal advice. You should always consult with your tax accountant.
So, what happens when the military retirement comes from a tax exempt entirely state or from a state that doesn’t have tax, yet the retiree still takes out tax on the portion of the ED agreement?
The above discussion is a clear, factual example. Thank you. Yes, it would be best for DFAS to administrate ALL the USFSPA accounts, and that requirement was in the original, initial legislation that Congress had on the discussion table. However, the Defense Dept strongly objected saying that the huge case load would cripple the Retired Pay operations. The 97th Congress threw a bone to the DoD by putting in the “10-year” requirement after the DoD totally objected to the USFSPA being brought into federal law.
No one can require or order DFAS to break federal law – the USFSPA says there must be a minimum 10-year overlap of marriage and good service time before they will accept a court order. Any state court judge who thinks they can “order DFAS” to break federal law needs to “think” in one hand and crap in the other and see which one fills up first ! ! !
interesting guess i paid taxes on pre divorce money, again helping my x, now im an expert, to bad ill nvr marry again, once was enough, beware of bi polar, thyroidisim and menopuase…..lesson learned
I was suggested this web site by my cousin. I’m not sure whether this post is written by
him as no one else know such detailed about my problem.
You are wonderful! Thanks!
All 50 states case laws can be posted trying to “prove” that military retired pay is “community property”. But,….when the USFSPA is repealed, then “McCarty” will re-prevail and military retired pay will then be untouchable – AGAIN !
Your mode of explaining everything in this article is genuinely nice, all can easily know it, Thanks a lot.
In your discussion of military retired pay being claimed as “alimony” on income tax returns, even though the IRS has decided that these payments ARE alimony, as the US Tax Court also held, the IRS will not create another line on their Form 1040 just to segregate military retired pay from the alimony claim line. It’s a moot point as to “the color of money” above line 22 -“Total Income” on Form 1040. As the former spouse’s payment is withheld by DFAS-Cleveland and the retiree never receives it, the retiree is exempt from paying income tax on the former spouse’s payments. Back in 1991 when the IRS directed DFAS to use Form 1099-R to report separate payments made to the retireee and to the former spouse, this was “supposed to” fix the tax liability problems being caused by unseparated income payment reporting. Your suggestion to have DFAS make ALL payments – repeal the “10 year” minimum service/marriage overlap – is the “correct and BEST solution”. This was also recommended in the DoD’s 2001 “Report” to Congress that then-SecDef Rumsfeld contemptously withheld for almost 2 YEARS, just to be released THE WEEK BEFORE “9-11” ! ! ! Coincidence, you say ? Assuredly – NOT ! ! ! “9-11” intentionally took public attention off of the Report ! If you suspect that the Report’s release was intentionally withheld, I’d fully agree ! ! ! Was Rumsfeld ever held accountible for contempt of Congress – NOPE ! ! !
Many homeowners are living in one of their largest tax deductions without even knowing it. This is especially true of people who have added on to their house or done some remodeling project recently. There are actually lots of different ways you can use home improvements for tax deductions. Sure, you can usually subtract the amount of interest you pay on your mortgage or home equity loans, but there are also a multitude of home expenses and upgrades you can use to reduce your taxable income if you meet certain requirements.`
I object to Dan Neilsen’s WAY-OFF-TOPIC posting remaining on line. Please remove it as it serves no purpose other than to detract from the continuity of the discussion.
Here’s why military retired PAY is CURRENT INCOME:
In Feb of 1990, the GAO stated, “This office has always maintained that retired service members receive retired pay rather than pensions because they continue to serve after retirement from active duty. In our letter [decision] B-236084, 31 July 1989, concerning Oliver North’s retired pay, we said that military retired pay constitutes current reduced pay for current reduced service, rather than a pension for past services rendered. We have stated this in our decisions since the first volume of published CG decisions – 1 CG 700 (1922). Our decisions follow the reason of the SCOTUS in U.S. vs. Tyler, 105 US 244 (1881).”
Additionally, 10 USC 1408(c)(2) says (in part), “Payments received by the former spouse may NOT be treated as retired pay for service in the uniformed services.” This is a CLEAR repudiation and absolute denial of any iota of allegation that a former spouse “served” under legally contractual agreement to provide human effort to the country’s defense posture. Also it should be a red flag to the various state income tax departments which allow full or partial military retired pay exemption from their state income tax laws that any former spouse claims for this military member state income tax exemption are of criminal intent and should be deeply investigated.
I am not an attorney, nor is this legal advice. It is my own opinion based on the law’s wordings.
To all who read this comment – please realize that the author of this info is favoring comments toward the former spouse. The reader must ask, “Why are you NOT equally mentioning the retired military member’s position and needs?”
(The DFAS payment is the recommended choice in Military Divorce Tips.) This statement egregiously MIS-leads the reader that all divisions of military retired pay can be disbursed by DFAS, which is ABSOLUTELY WRONG ! (Yes, it is well taken that ALL court ordered divisions of military retired pay should be manipulated by DFAS ! ) DFAS will only accept a former spouse’s application with a current (less than 90 day old) attached court order IF THE MARRIAGE AND CONCURRENT SERVICE TIME OVERLAPPED BY AT LEAST 10 YEARS ! This requirement is contained in 10 USC 1408(d)(2). If the court order does not show this ten-year marriage-service overlap, DFAS will not accept the application and return it to the former spouse without action. It is then the former spouse’s responsibility to consult currently licensed legal advice.
The USFSPA gave state divorce court judges the Greek mythical God “King Midas” touch of judicial alchemy – being able to surrepticiously change taxable income/pay into non-taxable “property” for division and then back again into taxable income for the former spouse. Students of Greek mythology will remember that Midas’s vanity lead to his death from hunger because he couldn’t eat – everything he touched turned to gold. Eventually, the USFSPA will die the same torturerous death from “hunger”, just as Midas, as there will be nothing for divorce courts to “feed upon” ! ! !
Re: “The reader must ask, “Why are you NOT equally mentioning the retired military member’s position and needs?””
Thank you for sharing your thoughts.
The bulk of this information was intended to focus on the military service member and shed light on whether he or she could claim former military spouse pay as alimony on a Form 1040 tax-return.
The intention for the former spouse was to show that the Proctor case ruling should have no impact on former military spouse taxes. At the same time, we do not want to mislead former spouses into thinking that the term “Alimony” should be mixed in with language on division of pay.
Readers should be aware that every military divorce is unique, a blog post (even if long) will not cover every angle, and detailed information can be found in the military divorce books available.
Thank you for refering readers to books on the subject of military divorces. Please add the one single best resource book available – “Divorce And The Military” by Thole and Ault, published by the American Retirees Association. It is easily avaialbe at http://www.americanretirees.com . Please add the front cover picture to your website.
Maybe it’s difficult to see the blue font ‘links’ in the comments above. If readers click through the link provided:
military divorce books
They can see the cover of Divorce and the Military II. Readers looking to save a little cash might consider a used copy click here.