Issue a 1099 to former ex spouse for Military retirement

[macuser_22]

If there was a QDRO then each spouse would have received their own 1099-R.    Either there IS a QDRO or there is not.    If their isn't a QDRO then you cannot invent one out of thin air.   The rules of the plan determine if there can be a QDRO or not.    Lacking a QDRO then the taxpayer that receives the money and 1099-R is stuck with the tax unless the divorce decree says the other spouse must reimburse the other spouse.   It is not possible for a taxpayer to assign part of retirement income and tax to another taxpayer on a tax return.  

That is what QDRO's for retirement plans and splitting of IRA's by the financial institution exist - it you could just do the same thing yourself then those would not be necessary or exist.

[Opus 17]

@macuser_22 

You are still missing a key fact. The payer for military pensions called DFAS does not split the accounts or issue separate 1099‘s if the spouses were not married for more than 10 years, even if there is a QDRO in place.  The QDRO is a matter of state law, and is satisfied by specific language in the divorce judgment or by other documentation under state law. But as we know from other contexts, state law is not binding on the federal government, and if DFAS won’t issue separate 1099s, there is nothing the taxpayer can do to force them to do so. But the fact the DFAS does not issue separate 1099s does not change the taxability of the income if the divorce judgment specifies (using the correct legal forms for the particular state in question) that the retirement income should be split. 

Put more simply, DFAS refuses to follow the rules that IRAs and pensions must follow, but that does not change the tax position of the pension holder or the ex-spouse.

[macuser_22]

I did not miss that.  It does not change the fact that only the financial institution that holds the account can split and issue 1099-R's.     I believe that the IRS defers to the plan rules for QDRO's.    The court order only *allows* a QDRO, but it is up to the plan rules to put it into place.

Here is a QDRO FAQ (see step 7). 

https://qdrosolutions.net/faqs.php

And:

https://qdromasters.com/military-pension-impact-divorce-remarriage/

QDROs are issued by a State domestic relations court. Then they are reviewed for compliance with the terms of the order and other applicable laws. A QDRO may be part of a divorce decree or it may be a separate document. The order is valid as long as it meets qualified domestic relations order standards and the standards of the plan in question.

The simplest solution is to simply send the money to the ex after withholding her share of the tax that she would have to pay if the QDRO was in effect.   If she objects then the remedy to go back to the court that issued the QDRO order and explain the situation.

[DG47]

I do have some verbiage in the court order that states, "Plaintiff is liable for all federal and state taxes on the retired pay received from Defendant and those amounts paid by Defendant to Plaintiff are deductible by Defendant and taxable as income to Plaintiff. "  What if I issued her a 1099-Misc or the 1099 for alimony? 

would it get rejected from the IRS and complicate matters?  Because the money she is getting is a portion of my retirement and I have been paying the taxes. She should pay her fair share of TAXES and I should get credit. 

???

[rjs]

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@DG47 wrote:

I do have some verbiage in the court order that states, "Plaintiff is liable for all federal and state taxes on the retired pay received from Defendant and those amounts paid by Defendant to Plaintiff are deductible by Defendant and taxable as income to Plaintiff. "

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@DG47  Your court order does not determine what is taxable income and what is deductible. Federal tax law determines what is taxable income and what is deductible. That statement in your court order is not enforceable, and the IRS is not bound by it.

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@DG47 wrote:

What if I issued her a 1099-Misc or the 1099 for alimony? 

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There is no 1099 for alimony. And, as you said yesterday, the money you are paying from your retirement is not alimony.

As macuser_22 said yesterday, you should be talking to your attorney about this. The court order was obviously written without proper consideration of federal tax law and the Uniformed Services Former Spouses' Protection Act (USFSPA). (The USFSPA is where the 10-year requirement comes from.) The best solution would be to get the court order revised so that it conforms to the applicable federal laws. TurboTax cannot solve this problem for you, and we here in the community cannot solve the problem for you.

I am not a lawyer, but it seems to me that it would be much simpler to just have you pay alimony in an amount equal to the net amount that your ex would be entitled to from your retirement pay. If you do that, be sure that the agreement takes into account the change in the taxation of alimony under the 2017 tax reform law. In view of the problems with the court order, you should probably get a tax lawyer involved to work together with your divorce lawyer.

[macuser_22]

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@DG47 wrote:

I do have some verbiage in the court order that states, "Plaintiff is liable for all federal and state taxes on the retired pay received from Defendant and those amounts paid by Defendant to Plaintiff are deductible by Defendant and taxable as income to Plaintiff. "  What if I issued her a 1099-Misc or the 1099 for alimony? 

would it get rejected from the IRS and complicate matters?  Because the money she is getting is a portion of my retirement and I have been paying the taxes. She should pay her fair share of TAXES and I should get credit. 

???

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Only businesses issue  a 1099-MISC in the course of doing business, individuals do not.

Again consult your attorney.

[DG47]

I mentioned to my lawyer all the feedback that I had gotten and his response was that it is not alimony, it is a property distribution. So how does that change things?  if at all?  the money is coming from my retirement amount? 

[Opus 17]

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@DG47 wrote:

I mentioned to my lawyer all the feedback that I had gotten and his response was that it is not alimony, it is a property distribution. So how does that change things?  if at all?  the money is coming from my retirement amount? 

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In the absence of a clear consensus, I would like you to consult an enrolled agent, that is an accountant who is admitted to practice before the IRS.

I agree it is a property settlement, and I agree that under the regulations, the income is taxable to your spouse and not you.  (This of course, assumes that your divorce order is written to confirm to whatever your state law requires for a divorce to count as a qualified domestic relations order.)

The fact that DFAS will not issue separate 1099s does not make the income fully taxable to you.  If the paperwork determined the taxability of income, then a contractor who never got a 1099-NEC would not be required to pay tax, and this is obviously not the case.

A qualified domestic relations order must say certain things, and it must not say certain things.

It must:

1. list the name and the last known mailing address (if any) of the participant and the name and mailing address of each alternate payee covered by the order
2. specify the amount or percentage of the participant’s benefits to be paid by the plan to each such alternate payee, or the manner in which such amount or percentage is to be determined,
3. specify the number of payments or period to which such order applies, and
4. specify each plan to which such order applies.

It must not:

1. require a plan to provide any type or form of benefit, or any option, not otherwise provided under the plan,
2. require the plan to provide increased benefits (determined on the basis of actuarial value), or
3. require the payment of benefits to an alternate payee which are required to be paid to another alternate payee under another order previously determined to be a qualified domestic relations order.

https://www.law.cornell.edu/uscode/text/26/414

If your divorce order meets these requirements, it is a QDRO, and the payments to your ex are not taxable to you, even if DFAS won't issue a separate 1099-R.  The only way I can think of to handle this on your tax return is to report less than the full amount of the 1099-R, and then have a letter ready for when the IRS sends you a deficiency notice.  You would include an explanation, a copy of the divorce order (the cover page, signature page, and pages describing the retirement account) and your ex's last known address (and her SSN, if you know it.) 

You don't issue a 1099-R and you probably don't issue a 1099-MISC, although that would be a matter for your accountant to advise you on.

If your divorce order does not meet the requirements, you may have to petition the court to have it modified.  Your accountant can help your attorney make sure the language is correct.  Until your order is modified, I don't know what you can do. 

See also

https://www.irs.gov/publications/p575#en_US_2021_publink1000226699

https://www.law.cornell.edu/uscode/text/26/414

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-qdro-qualified-dome...

[Opus 17]

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@macuser_22 wrote:

I did not miss that.  It does not change the fact that only the financial institution that holds the account can split and issue 1099-R's.     I believe that the IRS defers to the plan rules for QDRO's.    The court order only *allows* a QDRO, but it is up to the plan rules to put it into place.

I disagree.  I don't see anything in the law or those FAQs that makes implementing the QDRO discretionary on the part of the plan administrator.  A QDRO "creates or recognizes the right of an alternate payee" to a portion of the participant's benefits.  The law goes on to say "the plan administrator shall promptly notify the participant and each alternate payee of the receipt of such order" and "Each plan shall establish reasonable procedures to determine the qualified status of domestic relations orders and to administer distributions under such qualified orders."  Elsewhere the tax code says "Each pension plan shall provide for the payment of benefits in accordance with the applicable requirements of any qualified domestic relations order."

Arguing that this military pension is not taxable to the ex-spouse because DFAS did not prepare a separate 1099-R is the same as arguing that if my clients don't issue a 1099-NEC, then I don't have to report the income.  (However, because DFAS is part of the federal government, it is virtually impossible to force them to issue the separate 1099-Rs, as would be required by Fidelity or any other 401(k) plan administrator, for example.)

If the divorce order contains the required language (as described later), then the ex-spouse's portion of the pension is not taxable to the taxpayer.  The taxpayer may want professional advice on how best to report this on their tax return.  

[rjs]

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@Opus 17 wrote:
I don't see anything in the law or those FAQs that makes implementing the QDRO discretionary on the part of the plan administrator.

It's my impression that the "10/10 Rule" in the Uniformed Services Former Spouses' Protection Act (USFSPA) relieves DFAS of having to honor the QDRO.

https://www.dfas.mil/Garnishment/usfspa/legal/

"In addition, for orders dividing retired pay as property to be enforced under the USFSPA, a member and former spouse must have been married to each other for 10 years or more during which the member performed at least 10 years of military service creditable towards retirement eligibility (the 10/10 rule)."

The OP said yesterday that they were not married for 10 years.

He really needs to get the lawyers, working with an EA or a tax lawyer, to straighten this out.

[macuser_22]

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@Opus 17 wrote:

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@macuser_22 wrote:

I did not miss that.  It does not change the fact that only the financial institution that holds the account can split and issue 1099-R's.     I believe that the IRS defers to the plan rules for QDRO's.    The court order only *allows* a QDRO, but it is up to the plan rules to put it into place.

I disagree.  I don't see anything in the law or those FAQs that makes implementing the QDRO discretionary on the part of the plan administrator.  A QDRO "creates or recognizes the right of an alternate payee" to a portion of the participant's benefits.  The law goes on to say "the plan administrator shall promptly notify the participant and each alternate payee of the receipt of such order" and "Each plan shall establish reasonable procedures to determine the qualified status of domestic relations orders and to administer distributions under such qualified orders."  Elsewhere the tax code says "Each pension plan shall provide for the payment of benefits in accordance with the applicable requirements of any qualified domestic relations order."

Arguing that this military pension is not taxable to the ex-spouse because DFAS did not prepare a separate 1099-R is the same as arguing that if my clients don't issue a 1099-NEC, then I don't have to report the income.  (However, because DFAS is part of the federal government, it is virtually impossible to force them to issue the separate 1099-Rs, as would be required by Fidelity or any other 401(k) plan administrator, for example.)

If the divorce order contains the required language (as described later), then the ex-spouse's portion of the pension is not taxable to the taxpayer.  The taxpayer may want professional advice on how best to report this on their tax return.  

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Even the IRS says what I am saying.

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-qdro-qualified-dome...

A QDRO is a judgment, decree or order for a retirement plan to pay child support, alimony or marital property rights to a spouse, former spouse, child or other dependent of a participant. The QDRO must contain certain specific information, such as:

• the participant and each alternate payee’s name and last known mailing address , and
   
• the amount or percentage of the participant's benefits to be paid to each alternate payee.

A QDRO may not award an amount or form of benefit that is not available under the plan.

A spouse or former spouse who receives QDRO benefits from a retirement plan reports the payments received as if he or she were a plan participant. The spouse or former spouse is allocated a share of the participant's cost (investment in the contract) equal to the cost times a fraction. The numerator of the fraction is the present value of the benefits payable to the spouse or former spouse. The denominator is the present value of all benefits payable to the participant.

A QDRO distribution that is paid to a child or other dependent is taxed to the plan participant.

An individual may be able to roll over tax-free all or part of a distribution from a qualified retirement plan that he or she received under a QDRO. If a person receiving QDRO payments is either the employee's spouse or former spouse (not as a nonspousal beneficiary), then he or she can roll it over, just as if he or she were the employee receiving a plan distribution and choosing to roll it over.

IRS Pub 575 says the same thing.

"A QDRO may not award an amount or form of benefit that isn't available under the plan."

If the plan will not provide it because the plan requirements have not been met then is is not available under the plan.

Every reference that I have provided says the same thing.

[PaulD CPA]

You are correct that, in this situation where DFAS will not pay your ex-spouse directly, you should issue a 1099-R to your ex-spouse.  Here's where the IRS advises that: General Instructions for Certain Information Returns (2024)  

Intuit does not support the issuance of 1099-R forms.  A couple of service providers that do support the issuance of 1099-R forms are TaxBandits and Tax1099 (not an endorsement).   

Ideally, the subtraction for the amount you paid to your ex-spouse would be reported on Schedule 1, Line 24z - Other Adjustments. 

If using TurboTax Desktop, switch to Forms Mode and on the 1040/1040SR WKS, look for Other Adjustments to Income Smart Worksheet, Line G and enter Nominee 1099-R and the amount (as a positive value).

TurboTax Online does not currently support this.  Instead, you would need to enter it as Other Miscellaneous Income with a negative amount.  Within the Miscellaneous Income, Other reportable income topic, answer YES to the question that asks Any Other Taxable Income?  Enter 1099-R Nominee and a negative amount.  It's going to be reported on Schedule 1, Line 3z - Other Income (as a negative).  Not ideal, but accomplishes the reduction of your total income.

Beware, if you have a state return that provides special treatment for retirement income, make sure it's not excluding / subtracting more than your portion of the DFAS 1099-R amount.  This may require overrides using TurboTax Desktop.

It literally will take an act of congress to get DFAS to honor QDROs for marriages of less than 10 years.  Here's an excerpt of a DoD recommendation to Congress from 1999, which to this day, hasn't been acted upon.