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Tax Question - Federal Retirement Annuity as Alimony Received
Posted on 2/22/10 at 10:15 am
Posted on 2/22/10 at 10:15 am
Doing taxes for the mother-in-law, who divorced in late 2008. She is receiving a portion of her ex-husband's federal retirement (FERS annuity) as alimony.
FERS annuities are not generally taxable in our state. However, would hers be taxable as alimony?
FERS annuities are not generally taxable in our state. However, would hers be taxable as alimony?
2
Posted on 2/22/10 at 10:43 am to Dusty Bottoms
Is this in addition to what she was entitled to under state law for her share of the pension?
Is this how they classified it in the divorce decree?
Sounds a little fishy.
It almost sounds like they are trying to get out of having him claim it and then trying to get him a deduction as well. It would seem if they set it up this way (WHY?), then he would have to recognize the amount as income, and then get a deduction. And, she would be required to recognize it as income. Which, of course, weuld be the result if she just got her share anyway.
Get a copy of the divorce decree to see if this is really how they set it up.
Is this how they classified it in the divorce decree?
Sounds a little fishy.
It almost sounds like they are trying to get out of having him claim it and then trying to get him a deduction as well. It would seem if they set it up this way (WHY?), then he would have to recognize the amount as income, and then get a deduction. And, she would be required to recognize it as income. Which, of course, weuld be the result if she just got her share anyway.
Get a copy of the divorce decree to see if this is really how they set it up.
This post was edited on 2/22/10 at 11:02 am
Posted on 2/22/10 at 11:10 am to Dusty Bottoms
Does your mother-in-law live in a community property state? If so, she should have had a community interest in the retirement asset and should have received her interest in the asset as a tax free property settlement. The payments from the annuity would then be taxable to her as pension payments. Since the payments are from the federal government retirement plan they would be exempt from tax by your state.
As you describe it, you may have an economic form vs. substance issue. The ex-husband would receive a 1099-R reporting the total annuity payment and report the full amount on his tax return. He would then claim a deduction for alimony paid for the portion paid to your mother-in-law. She would report alimony received, and it would have no special character on her tax returns, and incur a state income tax cost. The form of the transaction causing the substance to be unfavorable to your mother-in-law. In order to get the proper economic substance, you could attach statments explaining that the character of the income is FERS annuity and attempt to take advantage of the state income tax exemption. This will achieve the same result for your mother-in-law as if she had gotten the annuity as a property settlement. However, it raises the risk of examination by the state, and they could always challenge the claim that the income is exempt federal retirement income.
I don't know what, if any, software you use to prepare the return, but the federal return should be no problem. Most software allows you to make adjustments from federal adjusted gross income to get to state taxable income. If one of the adjustments for your state is for federal pensions just report the alimony on that line and claim the exemption. It should escape scrutiny, but if it doesn't then you can make the economic substance over form argument.
As you describe it, you may have an economic form vs. substance issue. The ex-husband would receive a 1099-R reporting the total annuity payment and report the full amount on his tax return. He would then claim a deduction for alimony paid for the portion paid to your mother-in-law. She would report alimony received, and it would have no special character on her tax returns, and incur a state income tax cost. The form of the transaction causing the substance to be unfavorable to your mother-in-law. In order to get the proper economic substance, you could attach statments explaining that the character of the income is FERS annuity and attempt to take advantage of the state income tax exemption. This will achieve the same result for your mother-in-law as if she had gotten the annuity as a property settlement. However, it raises the risk of examination by the state, and they could always challenge the claim that the income is exempt federal retirement income.
I don't know what, if any, software you use to prepare the return, but the federal return should be no problem. Most software allows you to make adjustments from federal adjusted gross income to get to state taxable income. If one of the adjustments for your state is for federal pensions just report the alimony on that line and claim the exemption. It should escape scrutiny, but if it doesn't then you can make the economic substance over form argument.
Posted on 2/22/10 at 11:15 am to Newbomb Turk
I have not seen the divorce decree, but I will see if I can get a copy. Good suggestion. I may not have been clear on the details either:
Ex-husband retired after long career with the IRS, and he now receives his Federal Retirement annuity. As of January 2009, she began receiving x% of his annuity and any associated cost of living increases.
They filed married joint for 2008, and none of his annuity was included as income on the state return (correctly, as this is not taxable in our state).
Logically, the state would continue to receive no taxes on the federal annuity after the divorce. But the fact that it is being paid/received as alimony clouds the issue for me.
I wish I could ask the ex, as he should be the expert, but their relationship is such that this is not an option.
Ex-husband retired after long career with the IRS, and he now receives his Federal Retirement annuity. As of January 2009, she began receiving x% of his annuity and any associated cost of living increases.
They filed married joint for 2008, and none of his annuity was included as income on the state return (correctly, as this is not taxable in our state).
Logically, the state would continue to receive no taxes on the federal annuity after the divorce. But the fact that it is being paid/received as alimony clouds the issue for me.
I wish I could ask the ex, as he should be the expert, but their relationship is such that this is not an option.
Posted on 2/22/10 at 11:23 am to Poodlebrain
Thanks, PB. I believe it was a property settlement based on the way it was laid out (x% of all future payments, and that % was based on other property settlements (house, household items, etc.). What has me scratching my head is that she claims she has received no 1099.
FYI - I used Turbotax, and I like your suggestion, although as you say, it leaves open a stronger possibility of audit.
ETA - I believe he receives the entire annuity and then her % is transferred from his bank account to hers, so that would explain why she received no 1099. Seems like this setup is the cause of our headache?
FYI - I used Turbotax, and I like your suggestion, although as you say, it leaves open a stronger possibility of audit.
ETA - I believe he receives the entire annuity and then her % is transferred from his bank account to hers, so that would explain why she received no 1099. Seems like this setup is the cause of our headache?
This post was edited on 2/22/10 at 11:31 am
Posted on 2/22/10 at 11:37 am to Dusty Bottoms
quote:
As of January 2009, she began receiving x% of his annuity and any associated cost of living increases.
See if they filed a COAP. A COAP (Court Order Acceptable for Processing) is similar to a QDRO but is done for federal pensions. If she has a COAP, it's her share and she is taxed accordingly. If she didn't file a COAP, you may want to suggest that she speak with her divorce lawyer to straighten it out.
quote:
I believe he receives the entire annuity and then her % is transferred from his bank account to hers, so that would explain why she received no 1099. Seems like this setup is the cause of our headache?
She really should have gotten a COAP to spell out her rights, especially her rights when he dies. If he dies tomorrow, she's f'cked. With a COAP, she'd be protected. She might want to go speak with ANOTHER lawyer to see (a) if she can still file a COAP (doubtful), and (b) her rights against her divorce lawyer for leaving her in a learch in the event her ex predeceases her.
This post was edited on 2/22/10 at 11:46 am
Posted on 2/22/10 at 11:53 am to Newbomb Turk
quote:
She really should have gotten a COAP to spell out her rights, especially her rights when he dies. If he dies tomorrow, she's f'cked. With a COAP, she'd be protected. She might want to go speak with ANOTHER lawyer to see (a) if she can still file a COAP (doubtful), and (b) her rights against her divorce lawyer for leaving her in a learch in the event her ex predeceases her.
How does a COAP work? This guy was a fairly inexperienced attorney. I hope she didn't get hosed on this. From day 1, I had the same concern - what happens if he dies tomorrow?
Posted on 2/22/10 at 12:00 pm to Dusty Bottoms
quote:
From day 1, I had the same concern - what happens if he dies tomorrow?
It's extremely complicated. Much more complicated than a regular QDRO. Although there are regulations (and a booklet) which spells out exactly what can and can't be put in a COAP, figuring out what it all means is pretty difficult. My first job out of college was with a government agency. We used to get these COAPs, but we just passed them on to OPM and they would approve or disapprove them. Many were disapproved and the parties would have to start over. I do remember speaking with a lawyer and discussing how a party could really get screwed over if their representative didn't know what they were doing in filling out one of these.
You really should see a professional. As it stands now, I believe that if he dies tomorrow, she's f'cked and gets nothing. With a COAP, she could have received her portion for her life (although it would be a lesser amount). It's very similar to a regular QDRO for a regular retirement/annuity plan.
She really should go so a lawyer who knows about these things. I wish I could remember the guy's name that I spoke with, but it's been a number of years.
Posted on 2/22/10 at 12:12 pm to Newbomb Turk
Very helpful advice. Thanks again.
I found an article after reading your last note, which appears to say exactly what you are saying.
LINK
I want her to get the right help, but she literally has no money. Tough situation.
I found an article after reading your last note, which appears to say exactly what you are saying.
LINK
I want her to get the right help, but she literally has no money. Tough situation.
Posted on 2/22/10 at 12:16 pm to Dusty Bottoms
I've pretty much forgotten most of what I knew about this stuff. I don't even remember the difference between FERS and CSRS, although I do remember that they had different COAP regulations/requirements.
As they say, you get what you pay for. Maybe you can have the first attorney pay for it since he should have known what the hell he was doing and clearly didn't.
quote:
I want her to get the right help, but she literally has no money. Tough situation.
As they say, you get what you pay for. Maybe you can have the first attorney pay for it since he should have known what the hell he was doing and clearly didn't.
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