Relocation can be very time consuming and expensive, and the tax impact surprising. While IRS Pub. 521 provides the rules, it does not address the potential hit to payroll taxes.
Here is what you need to know:
Work Related Test: the move must be closely related in both time and place to the start of work at a new job location.
Distance Related Test: the new place of work and former residence must be 50 miles greater than the former place of work and residence, and the commute must have increased by at least 50 miles as well.
Time Test: For 12 months following the move, the employee must be a full time employee for at least 39 weeks at the new location.
Non-taxable moving expenses
Certain moving expenses, paid by or reimbursed by the employer are not taxable.
- Packing, crating and the transportation of household goods and personal effects.
- Lodging on the day of departure and day of arrival but not meals.
- In-transit storage for 30 days and insurance expenses.
- Cost for connecting or disconnecting utilities.
- Cost of moving automobiles and pets.
Taxable moving expenses
Other moving expenses paid by or reimbursed by the employer are taxable.
- House-hunting trips.
- Temporary living.
- Car rental.
- Reimbursement for loss on home sale.
- Tax gross-ups.
- Home sale closing costs.
- Bridge loan interest.
- New home purchase costs.
- Quick sale incentives.
- Duplicate housing assistance.
LUMP SUM PAYMENTS
- Lump-sum reimbursements are fully taxable to the employee. The employee then has to keep track of the non-taxable expenses and claim a moving expense deduction on their federal tax return which would then result in a reduction of their adjusted gross income (AGI).
- If taxable moving expenses are reimbursed by the employer, these amounts will be reported as taxable wages on the employee’s W-2. This can be significant.
- Employees need to be aware:
As their taxable income increases, it can push them into a higher tax bracket. The higher gross income can also impact the return by phasing out deductions and credits that normally reduce income taxes due.
What should be done?
Employers should communicate the tax consequences to the employee in order to help facilitate a smooth transition and avoiding negative surprises down the road.
Employees should contact their CPA with any questions regarding taxable and non-taxable moving expenses and its impact on their total tax liability. Tax laws can change and state laws can vary as well.
The relocation process is an important part of onboarding and retaining employees and should be administered with transparency. A professional executive recruiter can help communicate potential issues to avoid surprises later for both the employee and employer.
Bob Harrington Associates has been in the executive search business for 20 years and can help you find the best people for your business.