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What Does the IRS Consider Deductible?

Free eBook: A Guide to Developing Relocation Policies

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.

How Payroll Correctly Handles Relocation on W-2 Forms

Tracking and Reducing Relocation Costs

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.

The Payroll Tax Impact of Relocation Expenses

Tracking and Reducing Relocation Costs

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.

Relocation Misunderstandings Lead to Popular Myths


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.

Popular Myths

How to Calculate a Tax Gross Up On a Lease Payment


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.

Benefits of Including Gross Up in your Relocation Plan


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.

How does relocation assistance affect taxes?


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.

How to Check which Expenses Can Be Excluded from Income Tax


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.

Calculating Tax Gross Up


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.

Relocating Your Company? Consider Grants and Tax Incentives When You Choose Your Location


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.

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