On December 22, 2017, the enactment of tax reform (also known as the Tax Cuts and Jobs Act) brought about widespread changes to includable and excludable items, with moving expenses being one of the most notable.
Prior to tax reform, qualified moving expense reimbursements were excludable from an employee’s gross income, and unreimbursed qualified moving expenses could be deducted by the employee. For tax years after December 31, 2017, and before January 1, 2026, this is no longer the case; these moving expense reimbursements must now be included in the employee’s gross income and the employee will be unable to deduct any unreimbursed moving expenses. It is important to note, however, that employers are still able to deduct these reimbursements as wages on their corporate income tax returns.
International assignment costs can often create the most expensive class of employees in the company, and, in many instances, moving expenses alone can exceed $10,000 in the year of transfer. For those relocation programs with a traditional tax equalization policy in place, a key feature is keeping the employee whole and not burdening the assignee with additional tax costs.
When considering tax assistance for federal, state and social taxes, should the employer wish to settle these amounts, the gross up rate can easily exceed 60 percent. While many states conform to federal tax law, and will therefore require the inclusion of previously excludable qualified moving expense reimbursements there is at least one state, New York, that will not. The New York state budget provides that qualified moving expenses and reimbursed qualified moving expenses remain excluded from adjusted gross income for New York state income tax purposes. Employers will need to determine on a state-by-state basis whether a gross-up is required.
Employers with domestic and international cross-border relocations are now faced with significant cost increases as a result of tax reform and, depending on how they move forward with their domestic and global mobility programs, have some important decisions to make:
- How can these additional costs be mitigated?
- What overall policy changes need to be made?
- To ensure thriving domestic and global mobility programs, how should these changes be communicated to employees?
Relocation program managers should carefully consider these questions and consider how the answers align with their corporate goals. While cost control is important, equally important is the message that companies are sending to those employees who are considering a domestic or international move, be it short-term or long-term. As programs develop a policy around taxable moving expenses, clear and concise employee communication will be key, particularly if tax assistance is not being provided.
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