A notable change involves more employees working on temporary assignment – those employees who have agreed to take a short-term position in a new location (the IRS considers any move to a single location that is expected to be less than one year, a temporary situation). Reasonable expenses incurred due to temporary assignments are considered proper business expenses that can be deducted by the company and are not considered as taxable income to the employee. Thus, actual expenses reimbursed to an employee are not subject to federal or state withholding.
Another new trend is to reconcile state taxes, thereby ensuring complete tax coverage for the employee on the state assignment side. This methodology focuses on creating a comparison between what the temporarily transferred employee would have paid in federal, state, and local taxes in the permanent, or “live”, state to those incurred in the temporary, or “work”, location. The difference between those two comparisons is the amount due to the employee.
During a session at the 2014 Great Lakes Relocation Conference tax expert David S. Oltman, CRP, Chief Compliance Officer with Ineo Relocation Technologies, offered up some tax-saving strategies meant to not only help clients reduce costs, but, also transferring employees.
Some important questions to ask in pinpointing cost savings are:
- Is the expense for a business purpose? Whenever possible, look for a business purpose for an expense to save tax gross-up dollars.
- Are van line charges and final move expenses included in a lump sum allowance? Whenever possible do not include either van line or final move expenses in a lump-sum allowance. Why? Because both expenses are non taxable when receipts are provided and these costs should be separated from the lump-sum amount.
- Will we see an increase in tax gross-up percentages? Gross-up percentages could increase to almost 90% based upon proposed tax changes in 2015. The current percentage is 60%.
Important tax points all employees should consider before accepting a job transfer are:
- Excess FICA taxes withheld by an employer are refundable to both the transferring employee and the transferring spouse (if the spouse is also working in the new location)
- Foreign assignees need to be aware of the amount of time required by the IRS to be considered a legal resident in order to deduct moving expenses
- Special costs, such as pet transport or tips given to movers/packers, are considered deductible expenses
It pays, literally, to remain knowledgeable about tax ramifications, especially in the year of a job transfer. Being aware of current tax liabilities and understanding relocation trends will help to alleviate tax questions and costs on an annual basis. Going forward some new trends to watch for include:
- An uptick in companies now offering domestic tax return preparation as a relocation benefit
- Employers considering the utilization of a “pre-move tax consult”
- Relocation companies may opt to counsel clients that the following relocation policy language may be advisable to add: “Gross-up audit/tax reconciliations will only consider company income with regards to determining the appropriate tax bracket. Only credits truly lost, based on the actual tax return, will be considered.”
Keep in mind that this information is not intended to serve, either directly or indirectly, as financial or tax advice and you should always consult a qualified professional tax advisor when making decisions relative to your own tax situation.