Tax Reform 2017: Effects on Relocations and Transferees. RELO Direct, Inc. 161 N. Clark Street Suite 1200 Chicago, IL (800) 621-RELO

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1 Tax Reform 2017: Effects on Relocations and Transferees RELO Direct, Inc. 161 N. Clark Street Suite 1200 Chicago, IL (800) 621-RELO

2 The recently passed Tax Cuts and Jobs Act of 2017 is one of the most sweeping and far reaching changes of tax law in recent history. The new law will have significant impacts both on the employees who undertake a corporate relocation, as well as the companies that sponsor them. The consulting services team at RELO Direct has prepared this paper to focus mainly on the effects of the tax law changes related to mobility and home ownership. Historically, expenses incurred as a part of an employee relocation have fallen into one of two categories: excludable expenses (i.e. those expenses that are not included as income and do not result in additional taxes being owed) or taxable expenses (i.e. those that are reported as income and result in a tax liability for the transferee). Excludable expenses typically made up the most costly components of an employee relocation including, the home sale program, the shipment of household goods, the first 30 days of storage, and final move expenses. This will change for 2018 and beyond as the Tax Cuts and Jobs Act will result in more relocation expenses being taxable. Additionally, the law has affected the employee s eligibility for deductions and credits related to mortgage interest, state and local taxes, both standard and personal deductions, and more, which may result in an even greater tax burden. Tax Cuts and Jobs Act will result in more relocation expenses being taxable. When faced with these changes, many companies may simply decide to tax assist (gross up) these expenses. However, it is important to keep in mind that tax assistance is a benefit it is not a law and so we recommend that your organization undertake a review of your policy, your goals and philosophy, and what benefits (including what to tax assist) will be offered to those associates and new hires you are relocating. Household Goods and Final Move Expenses (Moving Expenses) Historically, the vast majority of the household goods costs and final move expenses have been excluded from the transferee s income. Because those items were considered excludable from income there was no need for employers to provide tax assistance on those costs. However, the Tax Cuts and Jobs Act suspends the deduction for moving expenses except for active duty members of the Armed Forces who are moving due to a permanent change of station. Result: Beginning January 1, 2018, all moving expenses incurred including household goods shipment, storage, and final move expenses will need to be reported as income, and employers must make a decision whether or not to tax assist these expenses. Additionally, because all moving expenses are taxable, there is no longer the need for an employer sponsored relocation to conform to the distance rule (commonly called the 50 Mile Rule), the one year rule (expenses generally had to occur within one year of the start date in the new location), or the time test (39 Week Rule). All of these rules have been repealed. Page1

3 RELO Direct s Recommendation: Whether or not to provide tax assistance for moving expenses should be congruent with the philosophy of your relocation policy and in parity with how other taxable expenses are handled. For example, if you offer the benefit of tax assistance on expenses such as temporary living and home finding, then you likely should offer tax assistance on moving expenses as well. Additionally, employers should reevaluate any accruals or budgets they have established for their relocation program. Home Sale Programs and Capital Gains Understandably, home sale programs have always been an area of key focus for corporations as the sale of an employee s home typically represents the largest cost component of a relocation. Following a properly structured home sale program and the 11 Key Elements of an Amended Value Sale developed by the Worldwide Employee Relocation Council (WERC), costs associated with a home sale program are not considered income to the transferee. This avoids incurring significant additional cost as there is no need to tax assist this expense. The new tax laws do not change the tax impact of a home sale program that follows the 11 Key Elements. A major potential impact transferees should take into account is the capital gains tax triggered through selling of their home. Result: Following the current home sale programs will not create a taxable event for the transferee and the capital gains resulting from the sale of the home remains the same. RELO Direct s Recommendation: No changes are needed to your relocation policy. Tax Rates and the Supplemental Rate The Tax Cuts and Jobs Act modifies and generally lowers current tax brackets; resulting in a potentially lower tax liability for the average household. The tax tables included below illustrate the changes in tax brackets for both those filing as Single and those filing as Married Filing Jointly. Note that the supplemental rate has decreased from 25% to 22%; all tax assistance calculations made from 2018 onward will utilize different marginal and supplemental rates. Result: It is estimated that over 80% of taxpayers will owe less in taxes than they did in Although the tax rates have been reduced, employers can expect to pay more gross up if they elect to tax assist the household goods costs and final move expenses. RELO Direct s Recommendation: Most companies will not make any changes to their tax assistance methodology; however, it is worth revisiting the philosophy of your tax assistance program. Page2

4 Standard Deductions, Personal Exemptions, and Itemized Deductions The Tax Cuts and Jobs Act of 2017 has made significant changes to standard deductions, itemized deductions, and the personal exemption. In the past, approximately 30% of households chose to itemize their deductions rather than to take the standard deduction of $6,350 (single) and $12,700 (joint). The new law nearly doubles the standard deduction to $12,000 (single) and to $24,000 (joint). In addition, the Personal Exemption has been eliminated. We would expect that going forward; households whose previously itemized deductions were less than the new higher threshold will elect the standard deduction, reducing the number of people who itemize their deductions. Result: Fewer families will itemize their deductions and, depending on the size of the family, the new thresholds may benefit or negatively impact families due to the elimination of the Personal Exemptions. RELO Direct s Recommendation: None no impact related to relocation. Page3

5 Changes to Schedule A Per Forbes, here is how Schedule A will be affected for the 2018 tax year following tax reform (note that numbers correspond to the numbers in the blue circles on Schedule A). While these adjustments do not directly affect corporate relocation, it is important to understand how they work and their overall impact. Page4

6 Medical and Dental Expenses. Medical and dental expenses will remain in place albeit with a lower floor, only expenses over the floor amount can be deducted. The floor before tax reform was 10% of adjusted gross income (AGI). For example if your AGI was $40,000 and you incurred $5,000 in medical expenses, you could claim a $1,000 deduction or $5,000 in expenses less the floor (10% x $40,000 = $4,000). Under the tax reform act, the floor has been reduced to 7.5% floor for two years beginning January 1, So under the above scenario, you can claim $2,000 as a deduction, or $5,000 in expenses less the floor (7.5% x $40,000 = $3,000). The provision is effective retroactively to the beginning of 2017 so you'll see this change on your 2017 and your 2018 tax returns. State and Local Taxes (SALT). Under tax reform, deductions for state and local sales, income, and property taxes normally deducted on a Schedule A remain in place but are limited (see #3 below). Foreign real property taxes may not be deducted under this exception. SALT caps. While SALT deductions remain in place, there is a cap on the aggregate the amount claimed for all state and local sales, income, and property taxes together may not exceed $10,000 ($5,000 for married taxpayers filing separately). Home Mortgage Interest. The home mortgage interest deduction didn't disappear but it did get modified. After December 15, 2017, the limit on acquisition indebtedness i.e. the mortgage used to buy, build or improve a home is $750,000 (or $375,000 for married taxpayers filing separately). For mortgages taken out prior to December 15, 2017, the limit is $1,000,000 (or $500,000 for married taxpayers filing separately). Beginning in 2026, the cap adjusts back upwards to $1,000,000, regardless of when the mortgage was applied for. For tax years 2018 through 2025, there is no deduction available for interest on home equity indebtedness. Charitable Donations. Charitable donations remain deductible under tax reform. The rules are largely the same with a few changes. The charitable standard mileage rate remains at 14 cents per mile and will not be adjusted for inflation. Casualty and Theft Losses. The deduction for personal casualty and theft losses has been repealed for the tax years 2018 through 2025 except for those losses attributable to a federal disaster as declared by the President (generally, this provision was meant to allow some relief for victims of Hurricanes Harvey, Irma, and Maria). Job Expenses and Miscellaneous Deductions subject to 2% floor. Miscellaneous deductions which exceed 2% of AGI will be eliminated for the tax years 2018 through These expenses also include unreimbursed travel and mileage, as well as the home office deduction. Itemized Deductions. The overall limit on itemized deductions is suspended for the tax years 2018 through Conclusion The tax reform passed was extensive and portions of the law directly impact corporations and their relocating employees. For more information, please reach out to your RELO Direct Vice President of Client Services or Hirsch Serman, RELO Direct s Senior Vice President, Client Finance and Consulting Relations. Hirsch can be reached at hserman@relodirect.com. Page5

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