The partial arrears payment the OPM did make to my ex had an income tax withheld. That partial payment will be deducted from my monthly annuity payments spread over the next two (2) years. Therfore, that parial payment will not appear as income for me. That partial payment won't be reported when I file my income taxes for both Fed and state. So why can't I deduct $8,029 from my 2024 income, similar to the effect of the OPM partial payment to my ex?
Opus 17 (Level 15) posted this reply:
If future payments are going to be subtracted from your pension before you receive it, and money sent directly to the ex, then your gross taxable pension reported on the 1099-R will be lower, your tax due will be lower, and your ex will get a 1099-R for their portion of the pension, and they will pay tax on their portion of the pension. That's how it generally works most of the time.
Here, you received $10,000 more than you should have. You will pay tax on everything you received. That is also correct, because you were paid what you were paid and you owe tax on that. Even if the amount you were paid is wrong, you pay tax on it because it was paid to you.
So now, having received an extra $10,000 and paid tax on it, how to make it right.
One possibility is that you pay $10,000 to your ex. OPM issues them a 1099-R for $10,000 and issues you a corrected 1099-R for $10,000 less than before, that you can use to file an amended return. But that's not allowed. You were paid what you were paid, the 1099-R must stand.
Another possibility is that you pay $10,000 to your ex, and issue your ex a 1099-R as nominee income. You don't do any withholding. Your ex reports the $10,000 income and pays income tax. However, you can't take a $10,000 deduction on your return because this is not alimony and the deduction is not allowed. So you never get your tax back on the $10,000 that you must pay your ex.
Another option would be for you to pay your ex $10,000. This is not taxable to your ex, because a redistribution of property or money pursuant to a divorce is not taxable to the recipient or deductible by the payer. But you could fairly complain to the judge, "why do I have to pay $10,000 to my ex, that I already paid income tax on." The judge might say, "that's a fair point. Your ex should reimburse you for the tax." So you pay $10,000, and your ex reimburses you $2000 for the taxes you paid.
That is, in fact, what is happening here. You owe your ex $10,000. Normally, this money would be subtracted from your pension before taxes, so you don't pay tax on it and your ex does. But, since you already paid the tax, the judge is allowing you to pay the after-tax equivalent of $8000.
At the end of it all, you will be in the exact same position as if OPM had split the pension payments when they were supposed to. Your ex is not getting anything under the table and does not report the $8000 as taxable income, because you already paid the tax and because because a redistribution of property or money pursuant to a divorce is not taxable to the recipient or deductible by the payer.
Are there any other options that will reflect this $8,029 subtraction from my gross income for 2024?
