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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.
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Policy Components and Taxability
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
POLICY COMPONENT
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes
No
No
EXCLUDABLE PRE – 1994
No
No
No
No
No
Yes
Yes
Yes
No
Yes
No
Yes
Yes
No
No
EXCLUDABLE 1994 & ONWARD
**With the use of an Amended Value Option or Buyer Value Option home sale program, the taxability status changes, as discussed below.
Note that the moving expense deductions and most final trip expenses remained the same in that they are a non-taxable benefit to the transferring employee as well as to the employer.
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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.
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.
FOR EXAMPLE:
The cost of 60 days of temporary housing for Transferee X is $7,145.58
The employer of Transferee X estimates the Federal tax owed on the
$7,145.58 benefit by multiplying it by 63%: $7,145.58 x 63% = $4,501.72
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. $7,145.58 + $4,501.72 = $11,647.30
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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 non-
taxable, 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.
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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’’).
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.
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.
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.
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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.
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Amended Value Programs and Tax Favorability
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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 $85,673.00. Of that total, home selling benefits average $42,584.00. The
second largest benefit expense is typically the household goods move, averaging
$12,600.00. 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.
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Relocation Tax Best Practices
These Relocation Tax Best Practices will help to minimize tax headaches for
employers and transferring employees.
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
Relocation policies should clearly describe which benefits are tax protected and which benefits will result in a tax liability for the transferee
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.
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Relocation Tax Best Practices
When the transferee has a choice of relocation benefits, he or she should elect those benefits that will minimize tax liability
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 year-
end approaches, the transferee is aware of expense cut-off dates. This will help to
eliminate the need for W2-C (W2 Correction) forms.
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.
Get more information
about how TRC
can help with your
company’s employee
relocation needs.
CONTACT US
TRC Global Mobility Services
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