Taxes and Relocation

 

Effective January 1, 2018

 

The recent tax law change removes the ability to deduct any expenses

relating to relocation, with the exception of certain government agencies.

We have kept certain sections below as a reference for those people

who have recently moved. 

The section on "gross-up" is not impacted by the tax law changes.

 

Most companies design their relocation programs around Internal Revenue Service (IRS) tax code publication 521 to ensure that both the employee and company remain compliant. If you are moving without company assistance, you may still able to deduct moving expenses. 

Before beginning your relocation you should check with a tax professional to understand how a move will impact your personal situation. For more information specific to moving and IRS taxes, click here. Note that this section only refers to moves originating and terminating within the United States. 

Qualifying for Deductions

You must meet the IRS qualifying requirements to be able to deduct moving expenses on your income taxes. A full explanation of these requirements can be found in Qualifying for Relocation.

Deductible Move Expenses

The IRS allows the following deductions for move expenses that you incurred, provided you meet all of the qualifying rules:

  • Reasonable expenses associated with the movement of household goods and personal effects
  • Reasonable storage expenses for up to 30 days, including transportation into and out of storage
  • Reasonable transportation, lodging, and one day of expenses to move each family member to the new home. Family members may move at different times

Business and relocation expenses must remain separate from one another, and at no time should a move expense be treated as business. It is the responsibility of both the employee and employer to comply with this rule.

An exception to this business expense rule is the IRS approved Amended Value home sale program, allowing certain home sale costs to be treated as a business expense. To be eligible, the sale of the home must follow strict guidelines (see Home Disposition).

Relocation Tax Benefits 

The tax burden of expense reimbursements can be crippling to an employee, because relocation programs often provide benefits well beyond what the IRS allows to be deducted. To account for this, your company may provide a 'gross-up' for expenses that are deemed taxable. Non-taxable reimbursements do not receive gross-ups. Neither of the tax treatments below are mandated by the IRS, rather they are an additional benefit, if offered by your company.

  • Gross-up benefit: a relocation gross-up is an additional payment provided to offset the impact of taxes, and is generally provided to an employee at the time of reimbursement. Your company may use any number of formula's to calculate a gross-up depending on their taxing method for supplemental expenses, but the bottom line is this: if you file an expense to get reimbursed for, say for $1,000, you will get close to the full one-thousand dollars back as a net check. 
      • A $1,000 expense + $320 gross-up = $1,320 gross pay...
      • $1,320 gross pay - 275 federal tax - 45 state tax = $1,000 net pay   

The simple example above shows that the net pay given to the employee is equal to the expense that was submitted. Your company will provide documentation on what types of taxes are grossed-up, noting that Social Security and Medicare taxes are usually not included.

  • Year end true-up: because your final tax bracket may be higher than the gross-up calculation percentage used for expense reimbursements, your company may provide you with an additional tax payment to 'true-up' the hypothetical gross-up based on your actual year-end earnings. At about the same time you receive your W-2 forms, your company will send a relocation summary document that outlines all of the relocation expenses paid to you during the year. Your company may provide your true-up payment to you at this time based on your overall income and certain assumptions, or ask you to complete some forms to return to the company for reimbursement.

Filing Your Tax Return

Its a good idea to use a tax professional to account for your relocation expenses when completing your annual tax return. Most of your reimbursements will be combined with your regular earnings, noted in box 1 on your W-2. The non-taxable portion of your reimbursement or payments will be in box 12 with a sub code P next to it. Also be sure to give your tax professional your company provided relocation summary document.

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