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Jon Andrews
Jon Andrews, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 3118
Experience:  I deal with all levels of tax planning and controversy - from the ordinary to the complex.
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child support paid me from ex husbands 401k

Customer Question

in '04 i won a case against my ex husband for years of un paid child support, sort of, he settled for less than what he owed to avoid court. he had to take 50k out of his 401k to pay a down payment and then makes monthly payments for a set amount of time until he pays off the agreed upon amount.

the organization that represented me took 34% (as they do with every payment). i received 33K of the down payment. is that down payment money to be claimed by me as income?

my ex is telling me that i have to pay tax on the full amount so he doesnt have to--$10,000 is what he wants to pay the taxes. i want to make sure i do things right. my settlement papers do not say that i am responsible for paying taxes on that amount.

my income for ’04 was about $17K-- single person--the last kid (of 4)now grown and on their own, so i dont have their deduction. she was in school full time in ’04 but is filing her own tax papers this year.

any help to tell which way i need to go would be greatly appreciated.

Submitted: 12 years ago.
Category: Tax
Expert:  Jon Andrews replied 12 years ago.

Unless part of the settlement represents interest, none of it is taxable to you. He might be asking you (or telling you) to claim it as a distribution from his 401K. Generally, that would be bad for you and, unless the settlement agreement specifically states that you are getting "his 401K" rather than getting back child support, would be incorrect.

Child support payments are not income to the recipient and are not deductible by the payor. If part of the payment is for interest on the past due amount, that part would be income to you.

You should tell him that he is responsible for the taxes.

[email protected]    
Expert:  Sandi Hargrove, SkyHawks replied 12 years ago.

 As indicated by Jon, unless the check was issued to you directly from the fund, you will not receive the 1099R for the distribution.  You will not be responsible to pay the tax and there is nothing he can do about it.

Generally if you are awarded a portion of his 401K AND have the option to roll this money into your own plan rather than take the distribution, you should not be taxed.

Customer: replied 12 years ago.
i did not receive a 1099, he did. for the sake of settlement , i agreed to forgo the interest due on the unpaid child support. the settlement states that he was to take a certain amount out of his 401k to make a downpayment for unpaid child support.

from what i understand the child support collection agency had to create some account to be able to receive the funds before disbursement to me less the 34% fee they reserved for their payment.

but i did not receive a 1099. i didnt roll anything over, i have no financial anything, no savings, no 401k, nothing. i spent about 2/3 on the 4 kids and their immediate needs (2 used vehicles, rent deposits, food, insurance, debt pay offs, vehicle repairs, groceries, etc, i have kept an accounting in a book, but not many receipts) and am saving the balance for emergencies down the road for them.

i just want to make sure that if the irs requires a portion of it that i know about it and pay it and satisfy my obligations.

Expert:  Jon Andrews replied 12 years ago.

Based on what you have posted-

You have no obligation to the IRS regarding this money. You received child support that was long overdue but, just because you received it in a lump sum, does not make it taxable. The source of the funds, i.e. his 401K, leads to a tax situation for him, not for you.

Keeping some for emergencies is a good idea. You do not need to reserve any for an IRS payment.

[email protected]
Jon Andrews, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 3118
Experience: I deal with all levels of tax planning and controversy - from the ordinary to the complex.
Jon Andrews and other Tax Specialists are ready to help you
Customer: replied 12 years ago.
thank you both for your information. it is a weight off my mind and a relief to find out the situation.

Customer: replied 12 years ago.

i found some papers that have given me some more information and i have another question.

the downpayment of $40,000 came from his 401k. a QDRO was drafted (i dont know what that is). he had to take out an additional $10,000 above what the downpayment was supposed to be that was supposed to cover any taxes i had to pay due to receiving the $40,000 downpayment to pay me for back child support--so he took out a total of $50,000. of that amount i received $33,000.

my settlement agreement states :

the sum due to the former wife as set forth in the QDRO shall be calculated such that the former wife receives no less than the net sum of $40,000 after all applicable tax withholdings and penalties/fines are subtracted. if the wife receives any monetary benefit in excess of $40,000 as an incident to her income tax bracket, said amounts shall become the property of the wife and shall not be credited against the remaining sums owed by the former husband pursuant to this agreement". its called a 'qualified domestic relations order'.

the ex- is saying he has to pay taxes on the $50,000 and thats why he wants $10,000 back.

after reading the irs site, i think its saying that i am liable for the $40,000. my income of $17,000 plus the $40,000 puts a whopper on me.

but if i pay the tax on it how could he be liable for the tax on it?
Customer: replied 12 years ago.
i got the check from supportkids. i contacted them after getting the letter from the ex-s lawyer demanding $10,000 and asked for their advice. they told me to just pay it and said i must have been over payed. but out of the $50,000 they received, they took their 34% portion of the $10,000 that was supposed to be for taxes.

Expert:  Jon Andrews replied 12 years ago.

Do you know for sure whether they got the money from him or directly from the 401K?

Did you ever receive notice of an executed QDRO?

Did supportkids receive the QDRO on your behalf?

If this was a QDRO distribution, you had the option of rolling it over into a IRA so that there would be no tax. Granted you may or may not have actually chosen to do that, but you would have had the option and, certainly, you would have had advance knowledge of any potential tax issues.

If the money is taxable to you, for whatever reason, the fee you paid to them should be deductible. If the money is not taxable, the fee will not be deductible.

I will see you through to the end on this if you will keep feeding me the information.

[email protected]

Customer: replied 12 years ago.
jon, if i had any brains, i would have paid more attention at the time this was happening.

all i can tell is that the money from his 401k went to another place or account set up by supporkids to receive the funds for disbursement to me from a UPS 401k. (my ex is some hot shot with UPS). i remember being told that he could not pay me directly because of the regulations of his 401k and it had to be sent to another account that took about 8 months to create.

supportkids sent me the check from their own account less their percent. i didnt know anything about rolling it over into a ira, what an ira was or that i had an option to get an ira. their lawyers worked with lawyers in florida that they hired (where the ex lives)who represented supportkids to solve the case.

all i was told was that an extra $10k was provided, (wrangled by the florida lawyers) to pay taxes if required of me by the irs. thats why i held on to it, i assumed there must be some sort of liability on my part down the road for the 40k. i had a feeling that somewhere someone would want it and i sure dont want to piss off the irs. if its calculated as child support them i know there is no liability---BUT if there is a stigma attached because of the child support coming from his 401k i need to know who i legally owe.

i keep re-reading the settlement agreement, the only reference to the QDRO and tax withholdings is what i posted above.

i will try to get more information tomorrow from supportkids but since they want me to just pay my ex and shut up im somewhat hesitant.

thanks jon
Expert:  Jon Andrews replied 12 years ago.

The only other thing I will say for tonight is - if there is some kind of payment from you to him beacuse of this, support kids needs to pay their share. It seems like they dropped the ball somewhere.