Not Alimony

Today TaxMama hears from Lorrie in New York who just got a sudden shock, “My divorce settlement of 2004 clearly states that neither party can make a claim for maintenance or spousal support. I do get 1/2 the net of my former husband’s retirement pension. The State deducts our taxes on the full amount, before sending him his check. He then writes me a personal check for my 1/2 of the net check.

IRS just sent me a notice saying that I did not include alimony income on my 2004 tax return. I owed nearly $5,000. I just learned that my ex reported my share of the pension as alimony from him. The IRS people told me my ex was getting a refund for my half of the withholding. Can you save me from the bread line?”

Hi Lorrie,

Owe. I’ll bet this hurts.

But one way or another, the pension income is taxable to you. You’re getting half his pension, as if you lived with him. Together, you would have paid tax on the whole pension check. Alone, you should be reporting pension income.

He really shouldn’t have shown it as alimony. But I’ll be he got a 1099 for the whole distribution
and didn’t know how to show that only half of it was taxable to him – and took the easy way out.

He really should have reported all the pension income and shown that only half of it was taxable, with a statement spelling out that you received the other half, and showing your name and Social Security Number.

The result would have been the same.

So, here’s what you do. Talk to someone at IRS. 1) Explain that this wasn’t alimony – and you can
provide the divorce agreement. AND that you’ve just had someone research this and learned that IRS is correct, this IS taxable to you as pension income.

2) Apologize profusely for not having understood this before. After all, while you were married, your husband took care of all these things and you really didn’t understand.

3) Ask them to waive any penalties, since this was an honest mistake.

The only penalty they can’t waive is the late payment penalty. But make sure they only charge you a half percent per month.

This will reduce some of that total balance – especially since IRS charges interest on the penalties, too. So the interest will also drop.

Now, one more thing. Since Hubby is only paying you half the net, you need to get credit for half the taxes that are paid. IRS has no way of doing that when you’re not married and all the withholding is reported under HIS Social Security Number.

So, two more things you need to sort out with your dear ex husband.

1) He owes you 50% of the withholding for all the years this has been going on. He’s been keeping YOUR money.

2) He STOPS deducting the withholding from your check. He must pay you 50% of the Gross, not the net.

And that’s another interesting tactic to take with IRS. But it will take some finesse.

Argue that the money is not taxable to you at all. That this is just your share of the marital estate.

And it’s clear that Hubby knew that, because he was taking out withholding on the full amount, not just on his half of the pension. And THEN giving you your share. He knew half the withholding was for your share.

It will take some work to get this one to fly, but it could just be done. Much of this will depend on how the divorce agreement is worded with respect to the pension.

You’re smart. Read through the information in your decree. And read through this information on IRS’s take on alimony http://www.irs.gov/publications/p504/ar02.html#d0e2012

And remember, you can find answers to all kinds of questions about alimony and all kinds of other tax issues, free. Where? Where else? At TaxMama.com

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