Divorce awarded 50% share of stock grant and each party was 100% responsible for their tax liability. Can one party issue a 1099-MISC to transfer tax liability of award?

[dnachmanatx-gmai]

Full stock grant was sold by company and paid as income to first party of divorce. Tax withholding on the full amount was deducted from award through first party's payroll check. 50% of grant was paid in cash by the first party to the second party of the divorce. First party wants to deduct amount of payment from his income and pass tax liability to second party. How is this done?

[MaryK4]

No, this would be a property settlement or possibly alimony, in either case it is not deductible. 

You can't deduct alimony or separate maintenance payments made under a divorce or separation agreement (1) executed after 2018, or (2) executed before 2019 but later modified if the modification expressly states the repeal of the deduction for alimony payments applies to the modification. Alimony and separate maintenance payments you receive under such an agreement are not included in your gross income.

[dnachmanatx-gmai]

Thanks for your response.

Just to be clear, the divorce decree states that if and when the award was granted (wasn't supposed to be until 2023, but was moved up due to sale of company) that each party would be 100% responsible for their tax liability of the award. I was told at the time that tax liability could be transferred using a 1099-MISC.  You are saying that the tax advice I received and language placed in the divorce decree was wrong? Thanks again for your help.

[GeorgeM777]

To follow-up on the response from @MarkK1101, the situation you described appeared to meet the IRS' definition of alimony and/or separate maintenance, and as such, the payment to the contra party is no longer deductible.  

The IRS defines a payment as alimony or separate maintenance if all the following requirements are met:

• The spouses don't file a joint return with each other;
• The payment is in cash (including checks or money orders);
• The payment is to or for a spouse or a former spouse made under a divorce or separation instrument;
• The spouses aren't members of the same household when the payment is made (This requirement applies only if the spouses are legally separated under a decree of divorce or of separate maintenance.);
• There's no liability to make the payment (in cash or property) after the death of the recipient spouse; and
• The payment isn't treated as child support or a property settlement.

Based on your description, it appeared that the transaction you wish to effect could fairly be described as satisfying the above requirements.  

However, not all payments made in connection with a divorce are considered alimony or separate maintenance.  In this regard, the IRS has stated that alimony or separate maintenance does not include the following:

• Child support,
• Noncash property settlements, whether in a lump-sum or installments,
• Payments that are your spouse's part of community property income,
• Payments to keep up the payer's property,
• Use of the payer's property, or
• Voluntary payments (that is, payments not required by a divorce or separation instrument).

Here is a link to the IRS webpage that discusses the tax issues regarding alimony and separate maintenance which you might find helpful.  

Alimony and Separate Maintenance

[dnachmanatx-gmai]

Thanks very much for your detailed message!

As I reviewed the categories of payments listed by the IRS definitions that you provided, would you not consider what I described as "Payments that are your spouse's part of community property income"? And therefore the payment would not be considered alimony or separate maintenance? The income from the stock sale was not guaranteed and  in fact would never have been paid if I left employment at my company prior to the award being earned. It was paid as part of my income which was defined in the divorce decree as community property income if received.

So assuming I can pass the tax liability of the payment to my ex-spouse based on the above, how do I do this? Do I issue her a 1099-MISC and then how do I deduct the amount paid from my income for 2021? I use TurboTax but couldn't find this situation listed anywhere.

Thanks again for the help.

[RobertB4444]

Nominee payments are payments that are received by one party on behalf of another and then passed along.  For instance, if you and your former spouse had sold a house you co-owned and the 1099-S related to that house sale had been issued to you for the full amount then you could issue a 1099-S to your former spouse from you for half of the proceeds and they would be liable for that amount.

In your case, the amount that you are proposing to transfer seems to be showing on your W2.  You have no way to issue a form to your former spouse that transfers W2 income from you to her.  If you were filing married-filing-separately this would be doable.  But not if both of you are filing single.

Income shown on your W2 has to be shown on your tax return and you are liable for the taxes.  Since your divorce decree says that your former spouse is liable for her portion of the taxes then your best option rests with figuring out what her liability is for her half of the proceeds and presenting her with a bill to cover the costs that are on your tax return.

Here is the IRS definition of a nominee (it's a ways down so I copied it below).

Nominee/middleman returns.

Generally, if you receive a Form 1099 for amounts that actually belong to another person, you are considered a nominee recipient. You must file a Form 1099 with the IRS (the same type of Form 1099 you received) for each of the other owners showing the amounts allocable to each. You must also furnish a Form 1099 to each of the other owners. File the new Form 1099 with Form 1096 with the IRS Submission Processing Center for your area. On each new Form 1099, list yourself as the "payer" and the other owner as the "recipient." On Form 1096, list yourself as the "Filer." A spouse is not required to file a nominee return to show amounts owned by the other spouse. The nominee, not the original payer, is responsible for filing the subsequent Forms 1099 to show the amount allocable to each owner.