Do I owe half the penalty?

[flutterby]

I got divorced in 2013. During the divorce process, Ex cashed out a smallish (about $40,000) pension. He had no taxes taken out and just split it with me 50/50. For the record, I told him cashing it out was a bad idea, and he was not happy about having to give me half.

Now he's getting ready to file his taxes and wants me to pay half the penalty. The divorce decree states the standard "all taxes, credits, etc. are the sole responsibility...etc. etc." He signed the decree. My thinking is he should have put something in the decree about me paying half the penalty. He didn't. To be fair, I didn't ask for half the mortgage interest deduction, because I figured that would balance out his penalty.

So do I owe him for half the tax penalty on the cash out? 

[mwcpa]

It is his penalty on his early distribution from his pension plan on his separately filed tax return as a single person, why would you pay his penalty?

Unless your separate agreement specifically says you will pay half his penalty and or tax costs on his ill advised move then you are not obligated to do such.

The payment of the money to you was part of the separation agreement as your equitable share of assets. 

You should double check with your attorney, but I would venture to guess that they will say tell him to take a flying leap.... his bad move, his level of irresponsibility, his penalty...

[kent]

Mar 1, 2014 11:58:01 GMT -5 mwcpa said:

It is his penalty on his early distribution from his pension plan on his separately filed tax return as a single person, why would you pay his penalty?

You should double check with your attorney, but I would venture to guess that they will say tell him to take a flying leap.... his bad move, his level of irresponsibility, his penalty...

Just curious.  Would that be the case if, for some reason, they are filing a joint return for 2013?  Community income for 2013?

[flutterby]

Thank you MWCPA!  That's exactly what I thought, but wanted a second opinion. I'll check with my attorney, too, but the decree clearly states his credits/penalties/ taxes are his and mine are mine. If I don't get to share the credits, I'm sure as heck not sharing the penalties!

Lesson: Read your divorce decree carefully!! I certainly did. He obviously didn't.

Kent, I would guess if we filed jointly (though there's no way we would) we'd have to share the penalty since it would all be lumped together.

[rangerj]

When a "married filing joint" tax return is filed any liability for tax, penalties, and/or interest, are joint and severable. That means that the government can get the entire amount from either of the filers of the joint return. I always advise a client contemplating a divorce to NOT file any joint tax returns because of the joint and severable liability issue. A separate tax return is a protection against such potential tax assessments. Also note that divorce attorneys are not "tax attorneys" and a separate tax advisor is highly recommended in a divorce situation, especially when numerous assets and/or a business is involved. 

[kent]

Mar 1, 2014 12:46:45 GMT -5 flutterby said:

Kent, I would guess if we filed jointly (though there's no way we would) we'd have to share the penalty since it would all be lumped together.

 Not a joint return?  Then I'd say you're home free!  I only brought it up because when I got divorced it actually made financial sense to file jointly that year - there were no pension payout issues to deal with.

[taz157]

Mar 1, 2014 13:01:09 GMT -5 kent said:

Mar 1, 2014 12:46:45 GMT -5 flutterby said:

Kent, I would guess if we filed jointly (though there's no way we would) we'd have to share the penalty since it would all be lumped together.

 Not a joint return?  Then I'd say you're home free!  I only brought it up because when I got divorced it actually made financial sense to file jointly that year - there were no pension payout issues to deal with.

For the federal return, the filing status is what you are on December 31st. If you are married, then married filing joint or married filing separately. If you are single or divorced, then the others. If you were married during most if the year and the divorce was finalized on December 30th, then you are considered Single for the whole year. States may be different, but I don't think so.

[flutterby]

Kent, yes, it would make financial sense for him if we filed jointly one last time. Though I didn't know that was possible once we were divorced. It would not, however, make financial sense for me.

Taz, yep, divorce was final in December, so I filed Single. I made absolutely sure the divorce would go through before Dec. 31.

[taz157]

Mar 1, 2014 14:02:56 GMT -5 flutterby said:

Kent, yes, it would make financial sense for him if we filed jointly one last time. Though I didn't know that was possible once we were divorced. It would not, however, make financial sense for me.

Taz, yep, divorce was final in December, so I filed Single. I made absolutely sure the divorce would go through before Dec. 31.

Both of you are Single for taxes (unless there are kids involved then one of you can get Head of Household), but definitely not a married filing.

[thyme4change]

I guess I feel like since you got half the money, you would owe half the penalty.  So, if the reason is just that he forgot there was going to be a penalty, it doesn't seem like a good enough reason.  But, if the reason is that he took a credit that was half yours, so it should even out that he should also take a penalty that was half yours - that is different.

Legally and morally are kind of different, but I think morally you took half the money, you should have only taken half of the net amount.

[rangerj]

She should not be liable in any way, shape, or form for HIS decision to take an early withdrawal from a tax deferred account, and incur a penalty, in order to satisfy the edicts of the court ordered decree. He could have borrowed the money rather than withdraw it from a tax deferred account. That was his decision, not hers. The penalty is on him 100%. 

[mwcpa]

As is noted, your marital status on December 31st is your marital status for the entire year, except if being single is due to the passing of your spouse, you are considered married for that year.

Example.

Single on 1-1-XX, married on 2-1-XX, divorced (final) on 12-31-XX at 11:59 PM.... I am single for the entire year, there is no part year married...

Get married on 12-31-XX at 11:59 PM.... considered married for the entire year...

[Deleted]

Did your divorce decree award you 50% of the pension, or $40,000 interest in the pension, or $40,000 to be distributed to you?  You have read the decree, so you and attorney would have the language to interpret.

If he cashed it before or during divorce, and it was cash on hand during the divorce, so awarded as cash distribution then the taxes are on him if he did not raise that penalty at that time.

[flutterby]

Thyme, honestly that's how I feel too, but only because I feel bad that he seems to be so uninformed and I'm taking advantage of his ignorance. Though his ignorance is his own fault. And even though we're divorced, I don't like to have him mad at me.

And then I remember, I didn't want him to cash it out. I didn't need the money. If he hadn't, I'd have still received half, so why should I be punished with a reduced amount? Also, I gave him credits I could have asked for that should even out the penalty. He just always wants more, and I'm tired of giving in.

Lilly, all the 401k's, etc. were split 50/50. Oh yeah, no they weren't. He had another small one that I didn't take half of.

I figure I've given more than I've gotten, so feel bad or not, I'm not paying half that penalty. 

[mwcpa]

If the court ordered that 1/2 of the pension be given to the original poster then she would have been given a "QDRO" (www.dol.gov/ebsa/publications/qdros.html and www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics---QDRO---Qualified-Domestic-Relations-Order) to allocate 1/2 the account to her name. At that point she could withdraw the income, generally free of penalty, but not tax. This was not a QDRO, and this was a property settlement and the former husband chose to fund it by withdrawing funds from his pension. His problem, not hers, he could have avoided the issues by having a QDRO set up, but he chose not to.

[rangerj]

Again, divorce attorneys are not tax attorneys and in any divorce situation there should be a tax professional consulted PRIOR to entering into a settlement. All to often we get to see the decree after the fact and the opportunity for tax planning/savings is lost.

[flutterby]

rangerj, you're right, and I absolutely realize all these questions should have been asked before the divorce was final. We both should have seen tax professionals before signing the agreement. Hindsight is 20/20 and all that, and at this point I'm just hoping I didn't screw up too badly. Thank you so much for your input, and you've convinced me, even though I've already filed, to go see a CPA for an overview so I won't have any new surprises.

[TheOtherMe]

Mar 2, 2014 11:04:30 GMT -5 rangerj said:

Again, divorce attorneys are not tax attorneys and in any divorce situation there should be a tax professional consulted PRIOR to entering into a settlement. All to often we get to see the decree after the fact and the opportunity for tax planning/savings is lost.

Oh so true.  The IRS does not care what divorce decrees say about dependents, etc.

In this case, since you were divorced before December 31, you are not legally liable for the penalty.  It is on his tax return.  Not yours.

[swamp]

Why didn't he do a QDRO instead of cashing it out?  

[flutterby]

He needed? or wanted? the cash. We did QDROs for other accounts.

[Deleted]

No feel bad on this one at all. Your desire was for half the asset, not a cash out. His attempt to reduce your value in the asset doesn't fly. When he whines you can remind him about the other account you didn't take.