Spousal maintenance 2020

[bpsmith7]

Hi, as part of a 2020 formal divorce in CO, the separation agreement was a spousal maintenance payment requirement of $x to my spouse.  I took that out of 401k,  and I pre paid 15% tax (10 fed, 5 state).  Couldn't do the $y per month so I paid all at once.  Now IRS wants wants to penalize for early w/d an additional 10% because I'm not 55 and didn't have special circumstances.  Ok, I get that.  This court ordered the payment, and we agreed to one-time payment.  Do I need to pay tax on this $x?  Or can I use it as a  court ordered payment? and utilize a deduction.  I understand child support doesn't qualify but does court-ordered one-time payment qualify?  Thanks.

[bpsmith7]

oops, one other fact I omitted--it wasn't a deduction from 401k, my bad.  It was from an IRA.  And no QDRO was involved.  It was just part of Separation Agreement in CO whereby you must adhere to all conditions.

[bpsmith7]

...and great...rookie user--I see replies but it won't let me open them...what the heck is this rookie doing wrong.  Thanks for your patience folks.  I can only reply to my own stuff...

[bpsmith7]

I'm game and somewhat desperate so I'll serve up my gmail since 2021 netbots know it already--if someone has a definitive answer, please send to [email address removed].  Thanks I assume I can trust the tax-burdened community 🙂

[bpsmith7]

crud it won't let me post my own email  Fail 🙂

[macuser_22]

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@bpsmith7 wrote:

Hi, as part of a 2020 formal divorce in CO, the separation agreement was a spousal maintenance payment requirement of $x to my spouse.  I took that out of 401k,  and I pre paid 15% tax (10 fed, 5 state).  Couldn't do the $y per month so I paid all at once.  Now IRS wants wants to penalize for early w/d an additional 10% because I'm not 55 and didn't have special circumstances.  Ok, I get that.  This court ordered the payment, and we agreed to one-time payment.  Do I need to pay tax on this $x?  Or can I use it as a  court ordered payment? and utilize a deduction.  I understand child support doesn't qualify but does court-ordered one-time payment qualify?  Thanks.

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If this was a QDRO (qualified domestic relations order) to divide the retirement account then the spouse should have receive their own 1099-R to report it.

If not a QDRO then Your agreement should have specified who was to pay the tax and how.

If you took the distribution and then gave the money to the ex spouse then YOU are responsible for paying the tax unless your agreement allows you to withhold the tax before handing over the remainder of the money.

This is a legal issue and not a tax issue and we cannot give legal advice here - consult your attorney.

[bpsmith7]

Rats, I think this reply nailed it, unfortunately.  I do recall specific language that I would gain/lose any and all tax benefits or disadvantages.  Son of a B.  Thanks.

[bpsmith7]

I get crushed 3 times--loss in court, loss with 15% being smart and self-deducting upon w/d, and one final kick in da nuts with IRS 10% penalty.  Anybody in need of a burger flipper?  How crushing.

[DawnC]

Unfortunately, no, you can't deduct the payment.   You can deduct alimony paid to a former spouse as long the divorce or separation agreement is executed by December 31, 2018.   Alimony payments resulting from agreements executed after that date can no longer be deducted due to the Tax Cuts and Jobs Act (TCJA).   The same holds true for agreements modified after 2018 if the new version specifically states that the TCJA treatment of nondeductible alimony payments now applies.

Since it was from your IRA and there was no QDRO involved, you will be incurring the ordinary tax and penalty on the withdrawal.  If the withdrawal was related to covid as opposed to your separation, there would be tax relief available.    

Those who qualify as individuals directly impacted by the pandemic will be able to withdraw up to $100k from their retirement accounts without facing the 10% early withdrawal penalty.

You qualify if:

• You, your spouse, or your dependent are diagnosed with COVID-19
• You experience adverse financial consequences as a result of being quarantined, furloughed, or laid off
• You had work hours reduced to COVID-19
• You’re unable to work due to child care closure or hour reduction

The distribution would be taxed over 2020, 2021, and 2022. 

[bpsmith7]

Thanks for the 2 responses Folks!  Great answers, and again I'll just go cry in my soup.  Looks like I need to buckle up for tax year 2020 and pay the piper, again.  Great community, responsiveness, and quality answers--thank you folks.