Prior to passage of the Tax Reform Bill certain moving expenses were considered excludable/deductible if certain criteria were met. The criteria included meeting the time and distance tests. The transferring employee needed to commence work in the new job (at the new work location) and work full-time for at least 39 weeks within the first 12 months after the move. He/she also needed to demonstrate that the new place of employment was at least 50 miles away from the old home than the old place of employment. The new tax reform law effectively negates the need for the above criteria since moving expenses are no longer deductible/excludable.
Relocation-Related Tax Reform Implications
- The mortgage interest deduction was reduced to $750,000 from $1,000,000 for mortgages originating on or after December 15, 2017. This is likely to affect transferring employees looking to purchase homes in higher cost of housing areas. Recruiting talent to relocate to these areas could become problematic.
- The state and local tax deduction is now capped at $10,000 in 2018 through 2025. This again could impact employees transferring into higher tax states as the cap will decrease the ability to deduct these items.
- Tax Rates and Income Brackets: The law’s seven federal tax brackets will now have the following rates:
Relocation America International is actively working with our clients and prospects to insure their programs are fully compliant with the new tax law and relocation policies are updated to reflect the new tax reality.
The above information is for general information only and is not presented as tax advice. Please consult with your tax advisor prior to making decisions and taking any action. For more information contact us at mobility@RAInternational.com or visit www.RAInternational.com
What is tax gross up? A tax gross up means the company has increased an employee’s pay, bonus, or any other taxable income so the employee doesn’t actually pay his/her own (estimated) tax. If they are told they are getting a million dollar bonus, the tax gross up means they actually get a check for $1 million after taxes. As most relocation costs are considered income to the transferee and subject to tax, tax gross up has the potential to greatly increase a corporation’s relocation cost.
Tax gross up is a legal business practice. If it is not done correctly, it can result in an audit and can bring adverse affects on your transferring employee and your corporation. An incorrectly filed tax gross up could mean employees might have to file a tax extension. In some cases, they might need to file an amended tax return owing to wrong W-2 statements. It’s advisable to hire services from a third party relocation management company that offers gross up tax assistance.
Gross-up/tax assistance on taxable relocation expenses is not required by the IRS; gross-up is a benefit that a company chooses to give to transferees who qualify. Most relocation policies offer some sort of tax assistance to transferees so their out-of-pocket tax costs due to the relocation are eliminated or reduced. One thing to keep in mind is that the gross-up payment itself also is taxable to the employee and subject to withholding and payroll tax. Therefore, to fully tax protect the employee, the gross-up must itself be “grossed up,” and the gross-up of the gross-up must be grossed up, and so on.
There are a few different methods used to calculate the gross up (inverse method, true up and simple method) and depending on how a company calculates the gross up, an employee may still end up owing money at tax time. Below is a comprehensive explanation of how each method applies to income. Managements generally maintain that the tax gross-up is a valuable tool for hiring and retaining talented executives. It is generally accepted within the relocation industry that transferees should not have to absorb the stress of relocation and suffer financially as well.
On Wednesday, February 26th House Ways & Means Chairman Dave Camp (R. Mich.) released a long-anticipated draft of a comprehensive tax reform plan. The goal of the reform plan is to simplify the tax code by eliminating a myriad of deductions and reducing tax rates for most taxpayers.
Contained within the tax reform plan are changes to the moving expense and mortgage interest deductions which would most certainly have a negative impact on employee relocation
. The moving expense deduction would be eliminated entirely. Although the draft does not provide any analysis of the reason, it claims the repeal would raise some $8 billion over the ten years from 2014-2023. The mortgage interest deduction would be retained, but would be limited in size and scope.
The current $1 million limitation on mortgage debt would be reduced to $500,000, but phased in over a four year period beginning with debt incurred in 2015. Interest on debt incurred prior to the reductions would continue to be deductible. Home equity indebtedness incurred after 2014 would no longer be deductible at all. The proposal also retains the ability to deduct mortgage interest on up to two homes, and specifies that debt that is refinanced after the new rules go into effect will remain subject to the old ones. The reporting provisions for mortgage interest would also be stiffened.
It is expected there will be no congressional action on the reform package in the near future and the intention of releasing the draft early is to stimulate debate leading to eventual tax reform that may yet be years away.