Minimizing the tax bill’s impact on transferees – IRS Clarifications
It’s been just over six months since the Tax Cuts and Jobs Act went into effect, and although the dust hasn’t quite settled – some areas are still being clarified by the IRS – we can now take a closer look at how it’s impacting mobility and the steps being taken in response.
As most HR and mobility teams know, the key changes for mobility include repeal of the employee deduction for moving expenses (except for those in the military) and caps on deductions for state and local taxes (SALT).
While the first one is obvious – employees are taxed when their companies pay their moving expenses, as this payment is considered income — the second can be somewhat less so. That’s because it varies. The financial loss that may result would depend on the employee’s overall household income and whether he or she lives in a high-tax state.
Higher wage earners with high value homes in these states (e.g., CT, NY, NJ and CA) can be hit much harder tax-wise than those moving to/from other states, as their deductions (which can include mortgage interest, property and state income tax) are now limited to $10,000. The takeaway for mobility here is that in some instances, if the financial loss would be fairly significant, an employee who is asked to relocate may decline.
Tax assistance: To help mitigate the increased tax burden for transferring employees, many companies are providing tax assistance, including supplemental gross up.
In some instances, though, employees may question whether this is sufficient, due to the fact that their tax liability is still higher than it was before the bill went into effect. However, this can be due more to the loss of itemized deductions, not insufficient tax assistance.
Clarifying this is fairly straightforward though. An employer can simply take the employee’s 2018 return and redo it without the moving expenses to show what the tax bill would have been had they not moved.
Lump sums: Companies are also increasing their use of lump sum programs. These are easier to administer, as there’s no need to go back and forth with exception requests, and are preferred by employees who want to manage their own moves.
Also, as the household goods shipment is now taxable, it’s considered taxable income to the employee when the company pays for this. This could then bump the employee into a higher tax bracket, especially when grossed up.
But lump sum programs can have disadvantages in certain scenarios, which should be taken into account by companies that are considering them.
The first is that although moving expenses paid by an employer on behalf of the employee may not be deductible for the employee, they are for the employer. Therefore, mobility teams should consult with the company’s corporate tax department on the best way to proceed, particularly as the overall corporate tax rate has gone down.
Companies that move many employees may also want to continue providing traditional domestic household goods benefits, as there could be a significant tax advantage to this. There are potential tax benefits for companies that move people globally as well, and here it may also be worthwhile to pay for a specific household goods move (especially if it’s very costly) rather than giving the employee a lump sum and itemizing these expenses.
Home sale programs: Another way companies can help offset the tax bill’s impact is by using a BVO or GBO program in lieu of direct reimbursement for home sale closing costs, as no gross up would be necessary. This, which would result in significant savings, could potentially even offset this year’s tax increases for overall gross up, depending upon move volumes and home values.
Misc. allowance and house hunting trips: Other steps that can be taken to help lessen the tax bill’s impact include paying miscellaneous allowances through payroll and withholding the appropriate taxes rather than paying them grossed up.
Companies can also provide employees with lump sums for house hunting trips, which has several benefits. It not only lets them control the trip’s cost, but provides some autonomy over how the money is used. An employee may prefer to spend more on airfare and less on lodging and meals, for instance, or vice versa. Additionally, if the trip can also be taken for business purposes (and include a client visit, for example) a percentage of the costs would be considered deductible business expenses.
For more information on how the tax changes could affect your organization, please contact msi and speak to one of our experts on (603) 274 9100 or email: firstname.lastname@example.org