When an employee is transferred and the employer reimburses his or her moving expenses, it is important not to overlook the resulting tax ramifications. These ramifications have evolved over the years. The most recent change to the U.S. tax code on moving expenses occurred with the passage of the 1993 Omnibus Budget Reconciliation Act according to Cord Moving and Storage and the Sales and Marketing Committee for North American Van Lines who have written several white papers on the subject and how it may impact relocation decisions.
Reimbursements as Compensation
With the exception of the shipment of household goods and travel to the new location, any relocation expenses that an employer reimburses or pays on behalf of an employee must be included in the employee’s gross income. That payment or reimbursement is subject to withholding and employment taxes.
When an employer reimburses its transferees for home sale expenses, temporary living, and house hunting, for example, these reimbursements must be reported in the employees’ incomes.
Likewise, the provision of miscellaneous and cost-of-living allowances, coverage for loss on the home sale, and employer payments for destination home purchase closing costs must be treated as compensation and reported on transferees’ W-2 forms. There is no corresponding moving expense tax deduction, and as a result, the employee faces taxes on these reimbursed expenses.
Most employers make an additional payment, commonly referred to as a “gross-up,” to assist employees with this added tax liability. This gross-up payment also must be reported as income and produces an additional tax liability for the employee. Some employers use a formula that accounts for the taxes not only on the moving expenses but also on the tax payment. The calculation identifies the amount that should be given to the employee if the employer wishes to cover the taxes on the tax payment, as well as those on the moving expenses.
Options for household goods and travel expenses. Unlike other moving expenses, there are two options for the tax treatment of employer reimbursements for household goods shipment and travel to the new location. For qualified moves, the employer may include such reimbursements in the transferee’s income—and the transferee then may take a tax deduction for them—or exclude these reimbursements from income, which eliminates the need for the employee to take a tax deduction for them. It should be noted that the elimination of the tax deduction in this second option does not penalize the employee. Since the expenses are not included in income, the employee does not face paying taxes on them.
Income exclusion option. To exclude employer payment for household goods shipment and travel to the new location, certain conditions must be met:
the expenses must be considered reasonable;
the transferee must account for his or her actual expenses within a reasonable period of time;
the transferee must return to the employer any excess of advances over actual expenses within a reasonable time;
the transferee must not have taken a tax deduction for the expenses on a prior year’s tax return; and
the move must meet the provisions of Section 217 of the U.S. Tax Code
Income inclusion option. If an employer elects to forgo the income-exclusion provision and includes reimbursed shipment and travel expenses in the transferee’s income, then the employee would be allowed a tax deduction for such reasonable expenses, provided the move met the requirements of Section 217 of the Tax Code. This is an “above-the-line” deduction, meaning that it is deducted in computing adjusted gross income. It is, therefore, available whether or not the individual itemizes his or her deductions. Consequently, even if the employer elects to include in income reimbursements for household goods shipment and travel, the offsetting deduction eliminates any tax liability for the employee and makes a tax gross-up for these expenses unnecessary. The employer also would not be required to withhold or pay payroll taxes on the reimbursements, because they are deductible as moving expenses.
Regardless of which option an employer chooses (inclusion in income with offsetting deduction or income-exclusion provision), tax liability on employer reimbursements for household goods shipment and travel can be avoided on qualified moves.
Reasonable expenses for household goods shipment and travel. The Internal Revenue Service defines “reasonable” household goods shipment expenses as the packing, crating, and shipping of household goods and personal effects of the employee and his or her household; disconnecting and connecting utilities, and insurance and in-transit storage for 30 consecutive days. The costs for moving automobiles and pets also are allowed in this expense category. In the travel category, deductible expenses include transportation and lodging costs for employees and their households on the final trip to the new location. Meals are not part of this category and must be treated as other moving expenses. That is, they must be included as income with no tax deduction. To qualify for the exclusion or tax deduction provisions outlined above, the employee’s move must satisfy the requirements of Section 217 of the Tax Code, which involve work-related, distance, and time tests.
Work-related test. The first requirement of Section 217 is that the move must be closely related in time to the start of work at the new job location. Expenses incurred within the first year after the employee reports to the new location are presumed to meet this test, but expenses incurred later also may be considered to qualify if the delay was due to extenuating circumstances. For example, if the move of the family has been delayed for two years so a child could finish school, those expenses would be deductible.
The 50-mile rule. The distance between the former residence and new place of employment must be at least 50 miles more than the distance between the former residence and former workplace. In other words, if the employee did not change residences, the one-way commute to the new job would have been at least 50 miles more than the commute to the old job. Consider, for example, an employee living in Annapolis, Maryland, and commuting 10 miles to a job in Baltimore. The employee is transferred to a job in Washington, D.C., that is 40 miles from the employee’s residence. In this scenario, if the employee moves to be closer to the new job in Washington, D.C., the employee will not qualify for the income-exclusion or deduction provisions because the 50-mile rule of Section 217 will not have been satisfied. The distance between the former residence and the new job is only 30 miles greater than the distance between the former residence and former job.
For more information as it relates to the “do’s and the don’ts” during your next relocation call the experts at Cord Moving and Storage with offices in Saint Louis MO, Memphis TN, Belleville, IL and Dixon MO. at (800) 873-2673.