Before we start we must state that deductibility is only applicable when the expenses are paid out of pockets and are not reimbursed by the employer. When deductible expenses are reimbursed or paid direct to a vendor by a transferee’s employer they become excludable from income but are not deductible. Deducting a cost that was not actually out of pocket would constitute double dipping. If you have questions regarding your relocation program speak with your company before filing any paperwork.
One of the principal reasons why people turn down relocation packages offered to them by their employers is the all-important issue of cost. Moving is expensive. Although many companies offer relocation packages that cover associated costs of movers and travel, not every employee receives the same benefit. But there’s good news. The IRS allows you to deduct some moving expenses on your federal tax return. Not all expenses are allowed, but there are enough available deductions to make it an effort worth your while. Here’s a quick list of what the IRS considers deductible moving expenses.
Household goods moving costs.
Allowable deductions include any money spent on packing, crating and transporting your belongings, automobiles and pets. Temporary storage costs are also applicable (up to 30 days).
Utility disconnect and reconnect fees.
This includes airfare, bus fare or train fare. It also includes hotel stays during travel, but doesn’t include meals. Any entertainment you take in or restaurant visits you pay will have to come out of your own pocket. You’re also required to take the most direct route available, which means no extended layovers in vacation spots along the way will be deductible.
Car travel expenses.
If you decide to do your own moving or drive your car, you can deduct a standard mileage rate of 23.5 cents per mile (in 2014). Or, if you’re especially good at keeping records and tracking receipts, you can deduct the actual cost of your car travel including gas costs. Tolls and parking fees can also be included. General maintenance and incidental car repair while moving isn’t deductible.
Moving Expenses Are an Above the Line Deduction
Here’s another thing many people aren’t aware of: your moving expenses are considered “above the line deductions.” In other words, the amount of money you spend on a move can be subtracted from your gross income, thus lowering your adjusted gross income when you file. Even better, above the line deductions can be taken even if you don’t itemize your deductions on your tax return.
Meeting the Requirements
In order to be able to claim moving expenses on your federal tax return, you have to meet three IRS Requirements.
Closely related in time.
In most cases you can deduct expenses incurred within 1 year from the date you first reported to work at the new location as closely related in time to the start of work. If you do not move within 1 year of your start date in the new location, you may not be able to deduct expenses.
The Distance Test.
The IRS stipulates that your new home has to be “at least 50 miles farther from your old home than your old job location was from your old home.” If you’re moving for a new job, the location of that job has to be at least 50 miles away from your old home.
The Time Test.
According to the IRS rules, “If you are an employee, you must work full-time for at least 39 weeks during the first 12 months immediately following your arrival in the general area of your new job location. If you are self-employed, you must work full time for at least 39 weeks during the first 12 months and for a total of at least 78 weeks during the first 24 months immediately following your arrival in the general area of your new work location.” If you don't meet these criteria, you may not be able to deduct your moving expenses.
Get the Facts
For all of the specifics on claiming moving expenses on your federal tax return, read IRS Publication 521. Since allowances and restrictions may change from one year to the next, be sure that the form you read matches the year of your move.
Employee relocations can have their fair share of tax implications. No other circumstance is quite as worrisome to the employee as the impact that can come about from receiving a lump sum payment to cover their moving expenses. These kinds of lump sum payments are taxable.
Minimizing Impact with the Tax Gross-Up
Companies footing the bill for an employee relocation often provide the added benefit of “tax gross-up.” This is done in order to minimize the financial burden that an employee can face when it comes time to file their tax returns. Since lump sum payments for moving expenses are considered taxable income, the tax gross-up is designed to assist in the tax burden caused by the additional taxable relocation costs. Here is how it works:
- Payout for the employee’s moving expenses is determined.
- An additional 40 to 60 percent is added to the moving expense amount.
- When the relocated employee receives his or her W-2 form at the end of the year, the moving expense will reflect the higher amount.
- After the expense is taxed, the amount of money the employee will have retained should be equal to the originally determined moving expense.
Expenses that Aren’t Reported as Taxable Income
Not every cent that an employer contributes for a relocation impacts the employee from a tax perspective. Taxes apply to the aforementioned lump sum payments, where a company gives the employee a check to use to pay for all of their moving expenses. This can be circumvented if the company is willing to make payment directly for household goods moving expenses. Many times, companies opt for this as a way to minimize stress for the transferee and to simplify tax considerations.
Not all companies offer to do a tax gross-up when it comes to paying for an employee’s moving expenses. For the most part, tax gross-ups are done as a courtesy to minimize impact on the employee – whether that impact is financial, emotional, or otherwise. Transferred employees who find themselves having to dig deep into their own pockets to offset the 40 to 45 percent tax rate imposed on the receipt of lump sum moving expense payments are not often happy employees. Logically, this can have negative consequences when it comes to work productivity, job performance, and seamless assimilation into their new surroundings. Companies whose principal goal in employee relocation is to provide for a smooth transition should consider the above mentioned options carefully – and work closely with their payroll and accounting departments to ensure that no errors are made in filing year-end tax paperwork.
Paul S., a regional sales manager, had exceeded his sales goals for five consecutive years. When the vice president of sales called him into his office, Paul was surprised to learn his boss wanted him to consider relocating to an under-performing sales territory in the Midwest. Paul's first thoughts were of the many changes – known and unknown – that relocation would bring to him and his family. The impact of relocating on his Federal income taxes was the furthest thing from his mind.
A relocation taking place in June or July can bring shock and dismay the following January when W-2 forms are mailed. Your transferee may not have realized many of the relocation expenses your company paid would count as taxable wages. Furthermore, your company will be obligated to remit payroll taxes on those wages.
To prevent unwelcome surprises, a thorough discussion of tax issues should take place during the pre-decision period along with other provisions of your corporate relocation policy.
The IRS allows employees to deduct specific costs of relocating. These specific costs become excludable from income if paid for by the company. These include:
- Transportation of household goods and personal effects
- Storage of same for up to 30 days
- Travel (including en route lodging) from the old home to new location, but excluding meals
- Out of pocket expenses for gasoline, or mileage at the current IRS rate, parking and tolls.
How your company structures its relocation policy affects the taxes you will pay.
Your relocation policy may reimburse transferees for the deductible expenses noted above, and also pay a lump sum relocation allowance to cover non-deductible expenses or provide reimbursement of these expenses. In this case the allowance or non-deductible reimbursements are treated as wages on the W-2, and the company is responsible for withholding and paying all relevant taxes: Federal, State, Medicare, Social Security, etc.
For example, the total cost of relocation in this example is $20,000. Of this, the company would report $5,500 as taxable wages.
Shipment of Household goods
Excludable; no payroll tax withholding or gross-up assistance required
Travel to new location
Excludable; no payroll tax withholding or gross-up assistance required
Temporary living expenses at new location (e.g., extended stay hotel)
Not deductible (taxable); treated as wages; must be taxed
“Grossing up” adds money to the allowance beyond the “usual” amount to minimize tax consequences for the transferee. Calculations to determine the additional amount can be done in several ways (see here and here for details), all of which attempt to avoid under- or over-compensating the transferee.
Grossing up a relocation allowance or taxable reimbursements clearly helps the transferee. It also helps your company in the long run: Over half of prospective transferees in mid-sized and large companies declined relocation in recent years as reported by Atlas Van Lines 2012 Corporate Relocation Survey. Grossing up adds an attractive incentive to relocate.
Impact on Your Corporate Tax Return
When your company pays the excludable expenses to a 3rd party or the transferee and doesn’t provide a lump sum for all expenses, you minimize your tax obligations and avoid incurring additional and unnecessary income tax costs.
Structuring your relocation policy to minimize tax obligations is one of many considerations you'll need to make in creating a policy that reflects your overall corporate goals and values.
Numerous myths surround corporate relocation policies. Most are based on simple misunderstanding of situations, but these issues can creep into formal policies without the creators realizing they are perpetuating the myths. Consider the following common myths--and address them in your policy.
Temporary housing charges paid directly to corporate housing firms are not taxable for the transferee.
IRS regulations have changed over the years creating this common misunderstanding by both transferees and employers. Always stay current with tax regulations and changes that sometimes come at a furious pace. If your HR or accounting department find this challenging, consult with your tax advisor or public accounting firm.
Reimbursed household goods moving and final move expenses are deductible by transferees.
These reimbursements must be documented properly to classify as "excludable" from income.
Moving household goods and other moving expenses are added to transferee earnings and appear on his or her W-2.
Home selling assistance is taxable if the relocation does not satisfy the 50-mile IRS test.
Interestingly, home sale assistance has its own set of IRS rules. Employers can still qualify for deductibility and transferees can receive tax benefits even if the relocation does not meet minimum mileage test rules.
Taxable relocation benefits are reported as transferee income in the new destination jurisdiction.
Since individuals are on a cash basis accounting system, non-excludable relocation benefits are taxable as of the date the payments were made. Reimbursing transferees prior to final move relocation and beginning work at the new location are taxable in their current--soon to be prior--state.
Home buying assistance including points and prepaid interest paid by the employer are deductible by transferees without any tax withholding necessities.
In most states, mortgage points and other prepaid interest are deductible when someone buys a home. Some employers misunderstand IRS regulations and withhold social security and Medicare taxes only. This misunderstanding can result in employer under-withholding penalties and interest. Further, some companies and rookie tax preparers mistakenly assume that, since the points were paid by employers, transferees cannot deduct them on their federal 1040, Schedule A. This is another myth as the transferee can still deduct up front points if they qualify under prevailing IRS regulations.
These are but some of the most popular myths surrounding corporate relocation policies that may cost employers and transferees unnecessarily wasted money in additional taxes and/or IRS penalties. Misunderstandings such as these can generate extra costs and increased IRS scrutiny for both employer and transferee.
Just as avoiding misunderstanding demands clarity of communication, whether oral or written, these expensive myths require understanding of the prevailing regulations and clear statements in relocation policies. The changing nature of IRS regulations challenge anyone from making "cast in stone" statements of fact regarding what is and is not taxable to transferees or employers.
The best advice is for employers and their HR departments to evaluate relocation policies regularly to ensure the language and benefits fit current regulations to avoid expensive errors. However precise your relocation policy language may be, if it references outdated information or regulations, your program could be in violation, costing transferees and the employer dearly.
If your corporate relocation program includes monetary help for transferees who rent or lease their residence, a gross up feature that mitigates income tax consequences for relocating employees is a welcome benefit. Prospective transferees in the middle of an active lease will be particularly grateful; at least until they learn that reimbursement to buy-out their remaining lease costs may increase their income tax liability.
Relocation program expenses that are not excludable from income (non-taxable) increase transferees' income, making these reimbursements subject to tax withholding. To avoid negative perceptions and eliminate some of the natural stress that accompanies relocation, tax gross up features help attract new talent and keep already high performing employees.
Three Methods to Gross Up Lease Payments
Whether you administer your relocation program internally using your HR department personnel or partner with a top relocation management company (RMC), you'll typically have three options to include a gross up component to help assist with potential tax consequences for your relocated employees.
Simple Gross Up.
Employers select a flat percentage to add to the direct cost of lease payments offered as help to transferees. This is the simplest method to mitigate potential income tax consequences. However, this technique, while easy to administer, may not help the transferee avoid all potential income tax increases.
The Inverse Method.
This method can be HR friendly but also ensures the tax assistance benefit is appropriately accounted for and grossed up (tax on tax or gross-up on gross-up).
The True Up Method.
This method “grosses up the gross up" but also takes into account employee income and filing status to arrive at a more accurate tax rate for each employee. Consider using a tax professional, such as a CPA, tax attorney or RMC, to effectively implement this method.
These three methods can be used for all taxable reimbursed expenses, in addition to lease payments, that generate increased tax liabilities for transferred employees. The techniques herein described, particularly the Inverse and True Up methods, will help you attract new talent and retain historically top performing employees.
The more generous and competitive your corporate relocation program, the more likely your transferees may incur a greater tax burden for reimbursed expenses the IRS considers taxable. Your HR department staff can also experience frustration when addressing this often confusing issue.
Gross up is a commonly misunderstood feature of strong relocation programs. Gross up methods often depend on the menu of relocation services you offer.
Development of a gross up policy should be given careful consideration, taking into account benefits offered and company culture. Some policies are designed to provide basic assistance while others are designed to avoid all or most potential tax consequences of reimbursing relocation expenses.
To avoid overwhelming your HR personnel, it is often prudent to retain a professional third-party relocation firm to track and categorize reimbursed expenses, some of which can generate added income tax consequences for the transferee. These administrative duties can challenge even the most experienced HR veterans, who already have full workloads.
History indicates that, because of changing tax laws and many variations of calculations, most employers benefit from having relocation or tax professionals perform or outline gross up issues. The benefits of including gross up features in your relocation plan are numerous and the downsides negligible.
Gross Up Benefits
Accurate gross up calculations help offset the projected income tax increase with reimbursed relocation expenses.
With a policy review and gross-up plan, employers may be able to maximize spend by replacing some taxable expense reimbursements with deductible (non-taxable) reimbursements, thus saving money on gross-up.
At least three options are available to calculate gross up.
Simple (flat) gross up is HR friendly, but may not fully offset the transferee's tax obligations. The supplemental inverse method can also be HR friendly but ensures the tax assistance benefit is appropriately accounted for and grossed up (tax on tax or gross-up on gross-up). The "true up" method is the more generous technique for calculating gross up amounts. This method “grosses up the gross up" but also takes into account employee income and filing status to arrive at a more accurate tax rate for each employee.
Gross up alleviates a major stress point for relocating new hires and current employees.
There are numerous stress components involved in a relocation, particularly if the transferee must move a family. Eliminating some of the potential tax burden relieves one of the primary stress activators present in a relocation.
Employers can tailor gross up calculations to better align with the transferee's marginal tax rate based on compensation level.
Even if you offer only a single relocation program, treating all transferees equally, you can still customize your gross up calculations to match transferees' different compensation and tax rate levels.
Including gross up features helps attract new talent and reduces turnover of current staff.
Knowledgeable employees know that not all moving expenses in relocation programs are tax-free. Including gross up features help you attract better employees and keep current high-performing staff involved in relocation.
In the absence of a gross up feature, employers are required to withhold on taxable relocation expenses which put the tax burden on the transferee.
While gross up features will increase the cost of your relocation program, including this component recognizes that you're in competition with other employers for the best available talent. Also, removing as many stress-inducing factors in a relocation is always beneficial.
Working with a top relocation management company (RMC) alleviates stress levels on your HR personnel. Senior management also benefits by not expecting HR staff to become relocation tax experts. Management, able to concentrate on strategy and operations, typically become more productive as they are able to focus on core job responsibilities.
What are your tax responsibilities when it comes to offering relocation assistance to your employees? What are their responsibilities?
As you might guess, these responsibilities differ somewhat. The following will provide you with a quick overview of how these can differ, and what you can and should do to assist your relocated employees.
The Difference Between Employee and Employer Taxes for Relocation Assistance
Keep in mind that taxes on relocation assistance will likely be different for you than they will be for your employees. For example, you may not pay any taxes on the costs of providing corporate housing to relocated employees. Your employees, however, usually will, as the IRS usually considers this to be a type of non-exempt employee compensation.
The same may apply to any monetary assistance you may offer. While many employees get away with never paying taxes on a relocation assistance package, other individuals have been made to count this assistance as income and pay federal taxes on it. This is especially true when the assistance is given up front. Their deductions instead came from moving-related expenses.
Relocation-Related Tax Deductible Costs for Employees
Employees can generally deduct the costs of the following when it comes to relocation:
- Automobile-related expenses: Gas and tolls, plus $0.10/mile driven or the total cost of shipping
- Lodging paid for in relation to the move
- Costs of any other forms of personal transportation used (air fare, train fare, etc)
- Other transportation costs such as moving vans or pull-behinds
- Disconnecting and reconnecting utilities (deposits, fees, etc)
- Disassembly & reassembly costs for certain items (such as outdoor pools, etc)
- Storage fees
- Packing & unpacking fees including boxes and paid moving assistance
Other Employer Responsibilities
How much tax-related reporting assistance should you provide to your employees when they relocate? That decision is largely up to you. However, it's typically a good idea to help them with their move as much as is reasonably possible.
At one time, employers were required to provide relocated employees with the IRS Moving Expenses Form (4782). While you are no longer required to provide this form, it is a very good idea to provide every employee with an itemized list of any reimbursements you make for moving expenses.
Every employee will also have to attach a copy of Form 3903 to their 1040 tax return form in the spring. You can do each employee a real favor by providing them with a folder that includes these necessary forms, as well as an itemized list of all assistance you have provided.
Keep in mind, however, that each employee's taxes are his or her own responsibility. Unless you are in the tax business, you should refer them to a certified tax professional if they are unclear on any point concerning taxes!
You may also be able to gain tax assistance if you help an employee sell his or her home--or if you buy it outright! As this can vary widely from situation to situation, you should consult a licensed tax professional in the matter.
This will help your business as much as it helps your employees. This kind of above-and-beyond assistance increases employee loyalty and happiness, which makes your business a happier, more productive place to work.
Moving is expensive, regardless of the distance or time of year someone relocates. Fortunately, many employers reimburse employees for some or all of their moving expenses. Some relocation expenses are excludable from income taxation, while others are considered extra taxable income by the IRS.
But, which are excludable and which are not? Many employers, wanting to avoid having their HR departments stay current with IRS moving expense rulings, outsource their employee relocations to top professional firms, to administer the review and tracking of taxable and non-taxable expense reimbursements.
Qualified Moving Expenses
Qualified relocation expenses are not included in an employee's income. They are paid directly to the employee or to third parties. Excludable expenses paid to the employee are noted on the employee's W-2 statement in box 12. Employers paying third parties directly on the employee's behalf for qualified moving expenses, such as payments to van lines, need not report these amounts at all on year-end W-2s.
Excludable moving expenses typically fall into two primary categories: Household goods and final move expenses. Common costs in these categories include the following items.
Moving Household Goods
- Estimates of the value of household goods, including personal possessions
- Packing and unpacking the goods at the former and new residence
- Expense of disconnecting, then reconnecting utilities for each home
- Pet transportation from old residence to new residence
- Cost of packing, crating and boxing supplies
- Expense of transporting personal vehicles to the destination
- Up to 30 days' storage expenses
- Gratuities and tips given to moving personnel
Employees may be reimbursed for additional expenses necessary to transport their household goods. In most cases, these payments are not considered taxable income.
Expenses of Making the Final Move
Many costs of making the final move to the employee's new home are excludable from taxable income. Reimbursed expenses that are excludable from income include, but are not limited to
- Transportation expenses to physically move the employee and his/her family to the new home
- In transit lodging expenses for the family
- Employer-paid auto expenses, for employees traveling by car, up to $0.23 per mile (rate varies each year and is dictated by the IRS)
To be excludable from income, the employee should take the most direct route to the new home.
Finding Excludable Relocation Expense Information
For employees or HR personnel wishing to check whether certain reimbursed relocation expenses are non-taxable, go to the IRS website. The U.S. Congress can--and sometimes does--modify these rules on an annual basis. Specific information on relocation expenses is outlined in IRS Publication 521, Moving Expenses.
It's said that death and taxes are the only certainties in life. I'll leave the answer to that question to the great philosophers. However, one thing is an absolute certainty; taxes are a fact of life. This is particularly true in the employer, employee relationship. The government requires the employer to deduct income and other taxes from the W2 employee's paycheck. Some would call this wise on the government's part, others wouldn't be so kind. In the corporate world, practically everything is taxed, including aspects of relocation packages provided to employees. Most relocation expenses associated with a move, whether it is a reimbursement made to a transferee or a payment made to a vendor on the transferee’s behalf is required to be reported as taxable income to the IRS.
Can you imagine the look on your employee's face when you gently explain that the generous relocation benefits provided will increase his or hers tax burden? It is a guarantee, the once happy employee's mood will change quickly and not for the better. Well, fortunately for these employees, the tax liability of the relocation package can be covered by a tax gross up paid by the employer. Unfortunately, grossing up can add 55% or more to relocation costs. If you consider the obvious benefit to the employees’ long term happiness, it is money well spent.
Tax gross ups of pay occur when the employer adds to the taxable relocation amount to cover the tax liability of the employee. For example, if the relocation costs include $5,000.00 taxable dollars, the employer may pay a total of $6,500.00 so that the employee gets the full benefit of the $5,000.00, as the estimated taxes of $1,500.00 are paid by the employer.
If you are in planning a relocation move, getting your hands on IRS Publication 521 entitled Moving Expenses and Publication 523 entitled Selling Your Home available at www.irs.gov would be a good place to start to fully understand the concept of grossing up.
There are 3 main ways to calculate a tax gross up.
1. Simple Gross Up, also known as the standard percentage method.
The simple method is a flat percentage calculated on the taxable expenses and then added to the income. For example, an employer will gross up at a rate of 25% for taxable expenses. If the transferee is paid $1,000, the gross up would be 25% of this, or $250, and therefore the transferee would be paid $1,250 total. Note that the gross up is also considered taxable income and may create an additional tax liability to the transferee.
This is the most common method used by human resource professionals. However, it’s important to note that this method doesn't always cover the employee in full for taxation.
2. The Inverse Method, also known as the tax on tax method.
The tax on tax method is sometimes used because not only are relo expenses considered income, but the gross up is considered income too. Therefore employers will pay the gross up on the gross up. You would add up all the tax rates (fed, state, OASDI, SS). Then divide the taxable expense by the sum of the tax rates. Take this number and subtract the taxable expense. This gives you the gross up amount. For instance, let’s say the transferee is paid $1,000 and has a total tax rate of 35% (federal, state, OASDI and Medicare). Take the tax rate (.35) and divide this by (1 - .35). This gives you the gross up percentage to cover not only the .35 tax rate, but the additional taxes incurred by paying the gross up. .35/.65 = 54%. 54% of $1,000 = $540, so the transferee is paid $1,540 total.
This covers the tax on the pay gross up, but still isn't 100% accurate in all cases.
3. The True Up Method
This method is more exact, as it takes into account an employee’s filing status and exemptions. This method brings in the tax professionals to assist in getting an accurate figure. It is performed by a CPA or other professional at the relocation management company. The calculation is performed at the time the expense occurs and again at the end of the year before the W2's are printed.
methods represent the nitty gritty of grossing up pay to cover employee's relocation tax liability. While one can do the calculations, it is always wiser to seek the help of an experienced relocation expert, who has experience and expertise with tax gross ups.
Thinking of relocating your company with the help of a company relocation service? In addition to providing support before, during and after the move, helping you select service providers and sub-contractors, and setting best practices and benchmarks for employee relocation packages, a company relocation service can also help you determine if a move is the best idea right now.
One factor to consider when contemplating a corporate move -- with or without the help of a company relocation service -- is grants, tax credits and other incentives available when you relocate.
New Jersey, Utah, North Carolina, Indiana, Michigan and Mississippi are just a handful of states that offer incentives for relocating. Chances are, wherever you're thinking of moving, you can find funds available to help cover some of the costs of the move.
Let's look at the ways incentives are offered.
A company relocation service can help you find the best grants available, help you run the numbers to decide if a move is worthwhile, and assist with filing your taxes to ensure you receive all the deductions and credits you qualify for.
- Tax credits: This money comes in the form of dollar-for-dollar credits to your tax bill. Credits may be pro-rated over several years, and there may be requirements you have to fulfill in order to receive the credit.
- Tax deductions: Unlike tax credits, tax deductions are expenses deducted from your taxable income, lowering your tax bill overall, but not on a one-to-one ratio. The IRS permits employees and businesses to deduct 100% of their relocation expenses as long as they are reasonable.
- Grants: Grants are monies you receive that do not have to be re-paid. Grants can help defray the cost of a relocation significantly.
Think this is complicated enough? Some states also offer retention incentives -- money you'll receive for staying in your home state and not relocating. A company relocation service can help you run the numbers and determine the best choice for your company's future growth.