Teachers, Police Officers, Firefighters, State Employees: If You are Getting a Divorce or You are a Spouse of Such a Person Getting a Divorce a Tax Benefit is Expiring December 31, 2018

As I pointed out in the article TIME
IS RUNNING OUT FOR TAX BENEFITS TO HIGH EARNING SPOUSE OR BUSINESS OWNER GOING
THROUGH A DIVORCE, the deductibility of alimony payments which
include payments drafted to qualify as alimony for tax benefits under the
Internal Revenue Code can be used to save you taxes or possibly gaining more
share of a public employee pension in a divorce.  Under current case law, the administrator of
these public employee pension plans cannot be ordered to divide these retirement
plans in the future.  This can result in
the employee who has accumulated the pension having to take the funds subject
to federal, state, and local income taxes and then pay a portion of that monthly
payment to their ex-spouse without deducting the tax attributable to the money
paid over.  Most orders require that the
non-employee spouse receive a percentage of the gross benefit.  Unfortunately, or fortunately depending upon
who is paying or being paid, this results in one person being taxed on funds
they do not keep.  Currently, it is
possible that the lawyers drafting the agreement or the judge issuing the order
will make some complicated provision for assigning the taxes to the person who
ultimately receives the funds.  In over
38 years of practice, I have never seen this happen.  The multitude of possibilities make such a
provision difficult, if not impossible, to draft.  One such example of an unpredictable change is
if the retiring party obtains a new job paying a high salary or remarries and
their spouse has income, resulting in the proceeds being taxed at a higher rate
than the spouse receiving the ex-spouse’s share would pay. 

Another issue is
that the Indiana Court of Appeals cannot agree on whether the trial court can
order the proceeds be divided.  See Board
of Trustees of Indiana Public Employees Retirement Fund v. Grannan, 578 N.E.2d
371 which stated that the court cannot order the PERF board to
divide up the funds; however,  the court
could order the retiree to pay the funds as he or she receives the money.  The court in Everette v.
Everette, 841 N.E.2d 210
stated that the account cannot even be apportioned at all.  The statute at issue is Ind.
Code 5-10.3-8-9 Benefits exempted from legal process; reimbursement of
employers; withholding payments while charges of criminal taking from employer
pending.  The
courts have interpreted this statute to mean the pension benefits of these
various Indiana retirement plans cannot be taken by court order.  Another important case is In
Re The Marriage of Adams, 535 N.E.2d 124, where the Indiana Supreme
Court ruled that the awarding of a portion of the employees pension does not
give the court or the ex-spouse the right to force the employee to elect early
retirement. The non-employee spouse cannot depend upon the money as the
employee spouse decides when she or he will retire.

The reason the
expiration of the tax provision is so important is more specifically set out in
the prior
article.  If you want to
review the article you can click on the link to be taken there.  Basically, the payments may be deductible to
the paying spouse and considered income to the receiving spouse.  This would allow them both to pay the taxes
on what they receive.  The amounts each
receive can be valued at the time of the divorce to make sure they are treated
equally.  Of course, you should consult
your C.P.A. as to how the division should be treated for tax purposes.

One may ask, “If I
am the receiving spouse, why would I want to be taxed?”  If the payments are drafted as a domestic
support obligation they may not be dischargeable in bankruptcy in the future.  Also, as pointed out in the prior
article, time is of the essence as these agreements.  To qualify, they must be approved in final
decree and signed by the judge by December 31, 2018.  Due to the holiday calendar your deadline
is most likely no later than December 21, 2018.