government retirementl partial arrears lump payment to former spouse ordered by CA court

[heartgems68]

Due to a miscommunication in establishing my Oct. 31, 2021 retirement from DoD; I've been ordered to pay $8,029.00 portion of $10,293.00 arrears (judge calculated amount minus 22% income tax withholding, also determined by judge).  This order is because the judge deemed the Office of Personnel Management (OPM) took too long to pay only a portion of the arrears my former spouse was due; so I am to pay from the annuity I've already received (from which approximately only 8% was withheld for my income taxes).  I've until the end of Oct. to make this payment.  To account for this loss of income for 2024, I've drafted a 1099R to accompany the check, which I plan to mail by Oct. 31, 2024.

An earlier questioned I asked a CPA/tax lawyer was: "Does the CA judge have the right to order me to pay what the OPM is responsible for (with the advantage of doing the correct income tax withholding 1099R)?  He thought the judge had that authority.

The 2nd/follow-on question I asked was: Acting now for OPM as a payer, do I file a 1099R?  He wasn't sure.

My draft 2024 1099R, aside from the data for the "payer" and "Recipient", only has 4 boxes filled:

1 Gross distribution: $8,029

2a Taxable amount: $10,293

4 Federal income tax withheld: $2,264

7 Distribution code(s): 7     (normal)

Any comments as to if I am doing the right thing?

[Opus 17]

I believe you may issue a 1099-R to your ex.  I think @Anonymous_  or @dmertz  will know the exact procedure. 

[VolvoGirl]

If you do the 1099R you will also have to send the $2,264 withholding to the IRS on with transmittal form 1096

https://www.irs.gov/pub/irs-pdf/f1096.pdf 

[heartgems68]

I believe yours is the best reply (so far)!  Thank you very much!  Much better than the $400/hr the tax lawyer charges!

I just finished reading all of the Form 1096 instructions and it didn't address any payment information; as I read it, its only purpose is as a cover sheet for form mail submittals to the irs.

Also, since 8% was already withhels from the total of $10,293 to me, shouldn't I only pay 14% (=22% - 8%) of that amount to the IRS, = $1,441.02?

Just between you and me, I have time to determine what action/filings I will make, taking into account the advice my divorce attorney gave me (not to file 1099R).

To be continued . . .

[Opus 17]

I'm not sure you actually need to send a 1099-R at all.  

The usual situation we deal with is a person with a less than 10 year marriage, where DFAS won't honor the court order and pays all the pension directly to the service person.  Suppose the pension is $20,000 and $10,000 is supposed to go to the ex.  If DFAS honored the order, each ex would get $10,000 and pay the tax on their portion.  If DFAS doesn't honor the order, the service person gets the entire $20,000 and has to pay all the tax, but is supposed to send $10,000 (not $7800 after tax) to the ex.  How to make that right.  Issue a nominee 1099-R so the service person can say "I got $10,000 net and am only paying tax on my half and the ex got $10,000 and has to pay their own tax.

What seems to be happening in your situation is that the judge is recognizing that you got $10,000 too much, and is telling you, "since you already paid tax on the part that is supposed to go to the ex, you only have to pay $8000 to the ex."   So it sounds like here, you just send the check for the net after-tax amount. Your ex is made whole, and you did not overpay, because although you paid tax on the whole pension, the payment you have to make is adjusted for those taxes.

I don't quite get the 8% question.  I think the judge is expecting you will pay income tax on the entire pension you received.  You will get a 1099-R, that will show any tax withheld to your benefit, and you will pay any additional tax owed because of your tax bracket.  You then send your ex the after-tax amount you owe, not the pre-tax amount.  I don't think you send an 1099 at all.  That would make your ex pay income tax on money that you already paid tax on.  You would only send a 1099-R if you were paying her the entire $10,000 you owed, which would force her to pay income tax (reducing her net after-tax benefit to $8000).

I think you have smart judge that has already taken taxes into account, and you have misunderstood the result of the judges action. 

[VolvoGirl]

Huh?  If you put $2,264 in box 4 for withholding that’s the amount you have to give the IRS.   Your ex will be claiming it as paid on their tax return.   It is separate from any withholding you have on your own 1099R.   You claim the 8% on your own return from your own 1099R.    Wonder why the judge said to withhold 22%?   It’s usually 10 or 20%.   Yeah I don’t know how you actually send in the withholding check or pay Online.   

[Opus 17]

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@VolvoGirl wrote:

Huh?  If you put $2,264 in box 4 for withholding that’s the amount you have to give the IRS.   Your ex will be claiming it as paid on their tax return.   It is separate from any withholding you have on your own 1099R.   You claim the 8% on your own return from your own 1099R.    Wonder why the judge said to withhold 22%?   It’s usually 10 or 20%.   Yeah I don’t know how you actually send in the withholding check or pay Online.   

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The judge is saying, you owe $10,000 but you only have to pay $8000.  The only logical reason is that the taxpayer already paid the taxes, so they are being ordered to pay the net amount.  The taxpayer is not going to withhold anything extra, and should not be sending a 1099-R at all.  

[dmertz]

I agree with Opus 17 that this is simply a cash payment of $8,029 to your ex, that you should not be generating any Form 1099-R and that you are responsible for reporting the $10,293 of income and paying the tax on this income.  The judge has allowed you to keep $2,294 of the $10,293 to put toward your tax liability.

[heartgems68]

Hi Opus 17 (Level 15),

     The 8% is what the OPM withheld from my annuity payments.

     So, it would seem the consensus is I do not need to file Form 1099R; however, my income for 2024 has decreased by $8,029 while my ex-spouse's has increased by that same amount.  How do I go about claiming that loss?  My divorce attorney has affirmed that it cannot be categorized as alimony.

     I anxiously await your response/guidance!

[dmertz]

"however, my income for 2024 has decreased by $8,029 while my ex-spouse's has increased by that same amount."

No, it hasn't.  This does nothing to change your reportable income or your ex-spouse's reportable income.  That's the reason that the judge allowed you to keep $2,294 of the $10,293.  The $8,029 is being treated the same as alimony which neither you your your ex-spouse are permitted to report on a tax return.

[Opus 17]

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@heartgems68 wrote:

Hi Opus 17 (Level 15),

     The 8% is what the OPM withheld from my annuity payments.

     So, it would seem the consensus is I do not need to file Form 1099R; however, my income for 2024 has decreased by $8,029 while my ex-spouse's has increased by that same amount.  How do I go about claiming that loss?  My divorce attorney has affirmed that it cannot be categorized as alimony.

     I anxiously await your response/guidance!

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If I understand your objection, your income is decreased because the judge ordered that it never should have been your income in the first place.

If OPM had made the adjustment correctly, you would have received $10,000 less from OPM, and paid $2200 less in taxes, resulting in a net loss to you of $7800, as a result of the spousal support order (apparently, your spouse is entitled to part of your retirement because you accrued these retirement credits while you were married). 

One way to fix this would be, you send $10,000 cash to OPM, OPM sends $10,000 cash to your ex, OPM issues a 1099-R to your spouse, and a corrected 1099-R to you.  That complicated, and OPM would probably refuse (its a funny thing, but a government agency can sometimes ignore orders from other government departments).

So the other fix is, you got all the income and paid all the tax, so you send the net after-tax amount ($7800) to your ex.  You and your ex are in the same financial position you would have been in, if OPM had split the pension payment correctly in the first place.  You can't deduct anything because either this is "not alimony" per the terms of your divorce, or the divorce was finalized after 2019 when alimony is no longer deductible even if it was alimony.  But you net the same in the end as if OPM had split the payment correctly. 

[heartgems68]

Sorry, but I can't make sense of it.

I got all the income, including what my ex-spouse should have gotten.  OPM has withheld income tax based on that.

Now I'm ordered to give my ex $8,029.  That will be coming from the total income I received from OPM, which has had income tax withheld.  [I'm not even concerned about my ex's income increase that probably is not going to be reported (under the table, so to speak)].  When I report my net income (gross minus income tax withheld, which will be reported on the Form 1099R from the OPM), why am I not able to report the $8,029 payment as ordered to my ex?

I can tell you that 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?

I appologize for my confusion, but I hope you can simplify it for dumb me to comprehend!

Thank you for your assistance, it is greatly appreciated!

[Opus 17 · Accepted solution]

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@heartgems68 wrote:

I can tell you that 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?

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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.