Corporations worldwide occasionally must move employees to key locations to perform work. Whether the worker is an existing employee who is transferring from one site to another, or a new hire who will relocate his or her entire family to a different state, businesses need a versatile corporatemobility program. A good corporate mobility program, allows corporations to attract the best talent, and move them where they need to be to have the greatest impact on the organization. Mobility is an investment in your people, which is the most important resource a company has. Many companies use assignments, transfers and rotations to upskill their workforce and modernize operations. With the arrival of 2018, Tax Cuts and Jobs Act relocation policies will need to be updated to keep employees whole and willing to grow with the company’s strategic needs.
The Tax Cuts and Jobs Act was signed into law on Dec. 22, 2017. Here’s a quick summary of how relocation and mobility programs are affected:
In the past, there were qualifying moving expenses that were tax deductible or could be excluded from being taxed. These expenses had to be reasonable as well as necessary, such as shipping household goods, pets and automobiles. In addition, an employee could exclude his or her expenses for storing items as long as those items were only stored up to 30 days.
The IRS stipulated employees had to meet two set criteria for these deductions and excludability rules to be applicable:
The Time Test: If you're 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're 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. There are exceptions to the time test in case of death, disability, and involuntary separation, among other things. See Publication 521 for these exceptions.
The Distance Test: Your new workplace must be at least 50 miles farther from your old home than your old job location was from your old home. If you had no previous workplace, your new job location must be at least 50 miles from your old home.[IRS Topic 455]
The IRS also provided an excludable moving rate for any expenses that were acquired during the last leg of the flight — such as purchasing airfare, mileage an employee may have if traveling by car, and lodging. Corporations adopted these criteria into their company mobility program so their program guidelines matched the established IRS guidelines.
Employees also were able to deduct the points associated with taking out a mortgage when purchasing a new home, real estate taxes when buying a duplicate home, and the interest on a home loan. Previously, employees could deduct mortgage debt interest for up to the first $1 million of a loan amount. It’s now $750,000. They could also take the so-called SALT deduction (state and local taxes) if they itemized deductions. Instead of taking the full amount, they now can deduct only up to $10,000.
Individuals can no longer deduct or exclude moving expenses on their federal tax returns. That means the previous IRS distance test or “50 mile rule” and time test of 39 weeks in 12 months, are now moot. Many companies still use this tests to decide when to offer relocation benefits, but they do not change the tax implications. All moving expenses are now taxable.
Mortgage loan programs, relocation bridge loans and relocation home loans are also impacted by the new law. For instance, the interest on interest-bearing bridge loans is no longer deductible.
Notably, the tax reform law does not apply to United States military service members who are making a move based on a change to their military status.
The consensus is “Yes!” Grossing up is the practice of offsetting the employee’s tax liability from relocation benefits. Since relocation benefits like household goods shipping, will now be taxed as income, the employees adjusted gross income increases, and in some cases may even put them in a different tax bracket. Many employers are electing to offset that tax hit, by grossing up the benefit. For instance if the household goods cost is $10,000, and the employee’s tax rate is 25%, then the employer would offer $2,500 as a lump sum to offset taxes on the household goods. For more information on how to gross up you can visit this blog by Patriot Software. Grossing up is a key relocation policy element, that keeps employees engaged and willing to move. If a company fails to gross up these benefits, employees may feel resentment at tax time, which may make them reluctant to take that next assignment. Companies who understand tax, and that the effective corporate tax was lowered from 35% to 21%, will understand that the investment in their mobile workforce is more than offset, by the tax windfall they received through the Tax Cuts and Jobs Act.