3 common tax issues in military divorce

On Behalf of | Jul 15, 2024 | Military Divorce

For military couples, divorce may bring about a unique set of challenges. The life you’ve built together – through deployments, relocations and the daily sacrifices of military service – is changing, and with that change comes a host of practical concerns.

For example, the tax implications of your separation can have far-reaching effects on your future. It’s, therefore, natural to feel overwhelmed. However, many have walked this path before you, and with the right legal knowledge and support, you can navigate these waters successfully.

Military pension division

Military pensions are taxable as ordinary income to the recipient. This means that if you’re the non-military spouse receiving a portion of the pension, you’ll need to factor in future tax obligations when considering the true value of this asset. A crucial legal matter to understand is the “10/10 rule. If your marriage lasted at least ten years, overlapping with ten years of military service, non-military spouses can receive payments directly from the Defense Finance and Accounting Service (DFAS). This can provide security, as you’re not relying on your ex-spouse for payments.

Combat pay and divorce settlements

Combat zone pay, though tax-exempt for federal income tax purposes, can complicate divorce negotiations. Even tax-free, it may be considered when calculating child support or alimony. For example, if you or your spouse received significant combat pay during the marriage, it might have allowed for a higher standard of living. Courts may consider this when determining support payments, even though the income itself wasn’t taxed. This means you must carefully consider the after-tax value of any support payments, as they may be based partly on tax-free income but will be taxable to the recipient.

Housing allowance changes

The Basic Allowance for Housing (BAH) can change post-divorce, affecting overall income and tax liabilities. Service members may see a reduction in BAH if they no longer have dependents, potentially increasing their taxable income. Non-military ex-spouses lose BAH eligibility entirely upon divorce. This loss of tax-free housing allowance can significantly impact their financial situation and should be considered in support calculations.

Given the intricate legal interplay between military regulations, state laws and federal tax codes, it is important to remember that every military divorce case is unique. These guidelines may not apply uniformly to all situations, which is why personalized legal and financial guidance can be invaluable as you embark on this new chapter of your life.