Relocation TAX. & the Mobile. Workforce

Transcription

1 Relocation TAX & the Mobile Workforce

2 Policy Components and Taxability Economic studies have repeatedly shown that a mobile workforce is a prerequisite for a strong, competitive economy. To maximize economic output, workers need to be willing and able to relocate to where the available jobs are located. Of course, even the best-managed relocation is disruptive, so for workers to consider relocating, it must be affordable and promise a net economic gain. Recognizing this, the U.S. Internal Revenue Service has allowed certain deductions or exclusions for bona fide relocation costs for many years. However, the scope and specifics of these deductions have changed frequently. The Revenue Reconciliation Act of 1993 had the unfortunate effect of making relocation less affordable for workers. Prior to this Act, many of the expenses an employee incurred as part of a work-related move were tax deductible, meaning that the expenses were excluded from the employee s income. After 31 December 1993, the IRS regarded most relocation assistance from the employer or reimbursement of moving expenses as part of the transferee s income. This effectively inflated the transferee s income and increased the tax liability. Below is a breakdown of some of the most popular domestic relocation benefits and how their taxability status changed. 2

3 Policy Components and Taxability POLICY COMPONENT EXCLUDABLE PRE 1994 EXCLUDABLE 1994 & ONWARD Home Finding Trip(s) New Home Purchase Assistance Temporary Housing Home Sale Closing Costs** Duplicate Housing Movement of Household Goods: Van line services Valuation Storage of household goods to 30 days Storage of household goods beyond 30 days Automobile(s) Final Trip to the New Location: Meals Lodging Mileage reimbursed to current IRS rate Mileage reimbursed above current IRS rate Relocation Allowance **With the use of an Amended Value Option or Buyer Value Option home sale program, the taxability status changes, as discussed below. te that the moving expense deductions and most final trip expenses remained the same in that they are a nontaxable benefit to the transferring employee as well as to the employer. 3

4 The Use of Tax Gross-Up These dramatic changes in the tax treatment of relocation benefits made relocation less affordable and less appealing for employees. To achieve their acceptance objectives, employers had to adjust their relocation strategies. Today, most companies that relocate employees have alleviated the tax impact of a move by covering the additional tax liability. This is a type of tax assistance that is generally referred to as gross-up. The company pays the employee a larger gross amount, so that the net amount of the benefit after taxes is roughly equal to the incurred relocation expense. Most employers use 63% as the average gross up rate to protect the transferee for Federal taxes. FOR EXAMPLE: The cost of 60 days of temporary housing for Transferee X is $7, The employer of Transferee X estimates the Federal tax owed on the $7, benefit by multiplying it by 63%: $7, x 63% = $4, Add the cost of the temporary housing to the estimated Federal tax due to arrive at the total cost of this benefit for the employer on behalf of Transferee X. $7, $4, = $11, The employer is responsible for withholding and paying the taxes on any relocation benefits paid on the employee s behalf. Employers usually encourage their transferees to seek professional tax preparation assistance to ensure that returns are completed properly and that no errors were made during the process. Some employers offer in-house tax assistance or reimburse employees for this cost. 4

5 Amended Value Programs and Tax Favorability To facilitate the move, many employers offer home selling assistance to homeowner transferees. Home sale assistance can come in various forms; however, the IRS has addressed and ruled favorably only on the Amended Value (AV) program. An AV program allows the transferee to market the property and attempt to find a buyer before the employer acquires the property and takes it into inventory. If the transferee finds a buyer, he sells the home to a third party Relocation Management Company (RMC) for the agreed-upon price, and the RMC, in a second and separate transaction, sells the property to the buyer for the same price. While this might seem rather convoluted, the IRS mandates that for a homesale transaction to be nontaxable, it must include these two separate sale transactions and adhere to Worldwide ERC s 11 Key Elements and Procedures of an Amended Value Transaction. If the employer and transferee follow these guidelines strictly, then no Federal tax is due on the homesale assistance benefit. 5

6 Amended Value Programs and Tax Favorability 11 Key Elements and Procedures of an Amended Value Transaction Any employee ( EMPLOYEE ) wishing to take advantage of the Amended Value Option who lists his/her home with a real estate broker must include a suitable exclusion clause in the listing agreement whereby the listing agreement is terminated upon the sale of the home to either the employer or the relocation company. Under no circumstances should EMPLOYEE accept a down payment from any potential buyer. Under no circumstances should EMPLOYEE sign an offer presented by any potential buyer. EMPLOYEE enters into a binding contract ( Contract of Sale ) with his/her employer or the relocation service company ( PURCHASER ). 5. After the execution of the Contract of Sale with PURCHASER and after EMPLOYEE has vacated the home, all of the burdens and benefits of ownership pass to the PURCHASER. 6. The Contract of Sale between EMPLOYEE and PURCHASER at the higher price is unconditional and not contingent on any event, including the potential buyer obtaining a mortgage commitment. 7. Neither EMPLOYEE nor the employer in the case of a relocation company transaction exercises any discretion over the subsequent sale of the home by the PURCHASER. 6

7 Amended Value Programs and Tax Favorability PURCHASER enters into a separate listing agreement with a real estate broker to assist with the resale of the property. PURCHASER enters into a separate agreement to sell the home to a buyer. PURCHASER arranges for the transfer of title to the buyer. The purchase price eventually paid by the buyer has no effect on the purchase price paid to EMPLOYEE. 7

8 Lump Sum Programs and the Relationship with Relocation Tax Lump sum programs continue to grow in popularity, offering some measure of flexibility to employees and cost-control to employers. However, it is important to understand the related tax implications. Lump sums as a whole are a taxable benefit; however, the way in which they are distributed can affect the transferee s tax liability. For example, if an employer simply provides the transferee with a single lump sum payment, that entire payment becomes taxable and the employer must decide whether to gross-up for taxes. However, with a managed lump sum approach (which allows the transferee to choose from a menu of benefits), the tax impact can be mitigated by making use of the excludable benefits first. In this instance, transferees need to be counseled carefully so that they make the most cost-effective use of the lump sum. According to the 2015 Transfer, Volume & Cost Survey published by Worldwide ERC, the average total relocation costs for a US domestic transferring homeowner is $85, Of that total, home selling benefits average $42, The second largest benefit expense is typically the household goods move, averaging $12, Strategically, it makes sense for those that have these two benefits covered by their employer, but do not have tax assistance on other relocation benefits, to utilize the home sale and household goods options first. 8

9 Relocation Tax Best Practices These Relocation Tax Best Practices will help to minimize tax headaches for employers and transferring employees. 1. Ensure that the relocation meets the IRS qualifications for deductible move expenses The new workplace must be at least 50 miles farther from the old home than the old job location was from the old home. (For college grads and others with no previous workplace, the new job location must be at least 50 miles from the old home.) The employee must be employed full time for 39 weeks during the 12-month period following the first day of work in the new location The move must correlate with beginning work at a new job location 2. Relocation policies should clearly describe which benefits are tax protected and which benefits will result in a tax liability for the transferee 3. Employers should discuss any tax liabilities with the transferee during the relocation orientation If the employer offers the transferee a relocation package without gross-up on some or all of the non-excludable benefits, he or she should be counseled on how to maximize the impact of the benefits while minimizing the tax liability. 9

10 Relocation Tax Best Practices 4. When the transferee has a choice of relocation benefits, he or she should elect those benefits that will minimize tax liability 5. By using a relocation management company to administer home sale programs (and relocation programs overall) and by paying household goods movers directly, employers will significantly reduce their tax liability and gross-up costs Because the tax aspect of any relocation is so important, clear and continual communication is essential. A transferee should never be surprised at tax time with a large and unexpected payment due to the IRS. It is the responsibility of the transferring employee to understand the tax implications of each relocation benefit, but the employer and the RMC (if one is involved in the process) should provide clear direction verbally and in writing. Employers should also ensure that as yearend approaches, the transferee is aware of expense cut-off dates. This will help to eliminate the need for W2-C (W2 Correction) forms. TRC Global Mobility Services Get more information about how TRC can help with your company s employee relocation needs. CONTACT US Employee talent mobility is TRC s only business. Our comprehensive domestic, international and government relocation services empower clients to achieve their business objectives in the US and globally in more than 150 countries worldwide. As an independent, employee-owned relocation services company, we are free to focus exclusively on our clients best interests without outside interference from a parent household goods or real estate company. This independence also gives us a unique ability to customize programs, reporting, technology and terms to meet each client s needs. While we bring 30 years of experience to each client relationship, there is no ironclad TRC way to approach relocation challenges. As experienced talent mobility specialists, we work with each client to structure best- practice talent mobility programs or to meet exacting government relocation service requirements. 10