Military Divorce: Counting to 10

By Mark Sullivan and Kris Hilscher, AAML

Jake Green and his lawyer are just returning from a morning in court. They’ve spent the last two hours finalizing the decree of divorce between Jake and his now ex-wife, Julietta. They also entered the parties’ property settlement into the court records, which included division of Jake’s military pension. Let’s listen in on their conversation and see if there’s something that can be learned…

Jake: I’m sure glad that’s over.  I feel like I’ve spent an entire lifetime in that courtroom, even though it was only about two hours.  The only question I have — before I settle up with your accounts receivable staff — is why the divorce took so long to get. Why did we wait an extra six months, after they’d already agreed with our settlement terms and all the divorce papers had been filed with the clerk?

Lawyer: It’s all about taxes, Jake.

Jake: Huh? What does delaying my “walking papers” have to do with taxes?

Lawyer: Here’s what you need to know… The pension division in your case can’t be implemented by the retired pay center[1] unless you meet the 10/10 rule.

Jake: What’s that?

Lawyer: The 10/10 rule means at least 10 years of marriage during at least 10 years of military service creditable toward retirement eligibility.[2] You have to qualify for 10/10 rule compliance in order for the monthly payments to Julietta to come from the government, and not from you writing a monthly check to her.

Jake: But I thought we were trying to avoid giving her that “magic 10” so that she wouldn’t have the convenience of monthly payments from the government, and so she’d have to come to me every month for a check.

Lawyer: Yes, it’s certainly “convenient” for Julietta to get a monthly deposit of retired pay into her bank account every month. And that’s why every former spouse wants to attain “10/10 status,” so she doesn’t have to chase her ex-husband (or ex-wife, in some cases) around the country to ask for a monthly check. But there’s an important benefit for military retirees as well, Jake.

Jake: And what’s that?

Lawyer: You’re paying Julietta 30% of your military pension as part of the property settlement, right?

Jake: Yes. We did the numbers and that’s what I agreed on.

Lawyer: And that’s $900 a month right now?

Jake: Yes — my net pension is $3,000, and she’s getting 30% of it, or $900 a month.

Lawyer: And you’re also being taxed on that entire $3,000 monthly figure, right?

Jake: Yes.

Lawyer: I assume that you don’t want to be taxed on the entire $3,000 once the payments to your ex begin…

Jake: Absolutely. I shouldn’t have to report my entire $3,000 monthly military pension when I’m not really getting $3,000. Julietta is getting $900, so I’m only receiving $2,100. I should get a deduction for that $900 pension division payment.

Lawyer: And that’s why we waited the extra six months, Jake. So we could reduce your tax liability through government payments under the 10/10 rule. If you qualify for pension-share payments from the retired pay center, then that means you get an exclusion from income — what you’d call a “deduction” — which means that only the remaining amount of your pension is reported to the IRS as taxable income. And the $900 paid to your ex is also reported to the IRS as income for her.

Jake: Now I see! So the 10/10 rule is really a WIN-WIN proposition, right? It gives the former spouse the benefit of direct deposits each month, and it gives the retiree the benefit of reduced taxable income.

Lawyer: You’ve got it, Jake! And another reason for having the retired pay center do the work is inflation.

Jake: What do you mean?

Lawyer: Whenever there is a COLA, or cost-of-living adjustment, you’ll see an increase in retired pay in the month of December. If you were paying your ex directly, you’d have to figure out the new number at the end of every year, and then adjust your payment to her — whether by personal check, allotment, or EFT (electronic funds transfer) — to stay in compliance with the court order.

Jake: But that’s not necessary when the retired pay center does the work, right?

Lawyer: Right!

Jake: What happens if there’s no “10/10” in a case?

Lawyer: Then the former spouse usually tries to get the payments made by the retired pay center as alimony or “spousal support.”

Jake: Will that work?

Lawyer: If there is an order for garnishment of alimony, then the retired pay center will enforce that through withdrawal of funds from the retiree’s pay and disbursement to the former spouse’s bank account. The usual scenario involves ensuring payments by stipulating that the alimony is not subject to modification or termination due to remarriage, cohabitation or change of circumstances. 

Jake: And if you were the other side’s attorney, how would you respond?

Lawyer: I’d use a “one-two” approach. First of all, if they were asking for my client to agree on alimony as a substitute vehicle for pension division, I’d negotiate for a fixed dollar amount, rather than a percentage. That way, my client would receive all of the COLAs.

Jake: What’s the second tip?

Lawyer: The second one recognizes the tax aspect of alimony. In alimony agreements and orders since 2019, pursuant to the Tax Cuts and Jobs Act, there is 1) no tax deduction for the payor, and 2) no taxable income for the payee. To take this into account, I would insist on a reduced amount payable to the ex-spouse.

Jake: Give me an example.

Lawyer: Suppose, as in your case, the monthly payment is $900. I would estimate the expected taxes for that $900 received by the former spouse. Let’s say that’s about $150 per month, federal and state taxes. Then I’d subtract that from the original amount and offer to pay the “adjusted amount of alimony” to the ex-spouse, at $750 per month, rather than the full $900 amount initially settled upon.

Jake: That way, the retiree gets a double advantage — all COLAs each year and reduced amount paid.

Lawyer: That’s right!

Jake: Well, I guess that wraps it up. Thanks for your help. I’ll stop by accounting to review my final statement and pay my bill, so we can close this out.

[1] Pension division for the Army, Navy, Air Force, Space Force and Marine Corps is handled by the Cleveland office of the Defense Finance and Accounting Service (DFAS).  It is administered for the Coast Guard and the commissioned corps of the Public Health Service and of the National Oceanic and Atmospheric Administration by the Coast Guard Pay and Personnel Center in Topeka, Kansas.

[2] 10 U.S.C. § 1408(d)(2).

Messrs. Sullivan and Hilscher practice family law in Raleigh, N.C. at Sullivan & Hilscher Family Law. Both are Board-Certified Specialists in Family Law and Fellows of the American Academy of Matrimonial Lawyers. Mr. Sullivan is a retired Army Reserve JAG colonel.