SIRVA’s Take on How 2018 US Tax Reform Will Impact Your Mobility Program
The 2018 Tax Cuts and Jobs Act was signed by the president on December 22, 2017, and includes changes that may significantly impact relocation.
The tax bill requires that all relocation programs be updated in three key areas:
- IRS Move Criteria - Under prior guidelines, certain moving expenses were considered excludable or deductible if certain criteria were met. The criteria included:
- Meeting the time test: The timing of the move must be closely related to the start of the employee’s new employment to qualify for the tax deduction. The employee must start the new job and work full-time for at least 39 weeks within the first 12 months after the move. An exception to the requirement exists if the employee moved before family because of special circumstances
- Meeting the distance test: To claim moving costs, the new place of employment must be at least 50 miles away from the old home than the old place of employment. Members of the United States military can claim moving expenses regardless of the distance or employment requirements in instances where the move was due to a permanent change in military status (e.g., retirement or termination of service)
- Qualifying expenses: All expenses claimed must be both reasonable and necessary for the move.
Under the tax reform bill, moving expenses are no longer excludable or deductible, effectively removing the need for the above-referenced criteria. Organizations will need to determine whether to maintain the IRS criteria as relocation program eligibility (i.e., in order to be eligible for relocation benefits, certain criteria must be met). Employers must also consider the go forward tax support approach for state taxes (where applicable) – unless the state opts out of the federal changes, moving expenses that were previously excludable/deductible on state filings will be eliminated in line with federal guidelines.
2. Tax Excludable Expenses – Some tax excludable expenses will now become taxable:
- Household goods shipment
- First 30 days of storage
- Pet shipment
- Automobile shipment
- Final trip expenses - lodging, airfare and mileage to the IRS tax excludable moving rate
*Prior versions of both the House and Senate bills included an adjustment to the home sale exclusion to increase the “2 out of 5 year” principle residence requirement to “5 out of 8 years”. This adjustment is not included in the final version of the bill, so there are no changes with regard to the home sale exclusion as it relates to current guidelines.
Organizations will need to make decisions regarding tax support (gross-up) for the now taxable moving expenses. The decision may be applied uniformly across all relocation policy types and/or policy components, or the tax support approach may vary based on relocation policy type and/or policy component. These decisions may have an impact on the employee’s ability and/or willingness to relocate, as well as total program costs.
3. Tax Deductible Expenses - Some tax-deductible expenses will now be fully taxable, including points under new home purchase assistance, as well the home loan interest and the real estate tax portions of the duplicate housing benefit.
For any new home purchase (post-December 15, 2017), deductions for interest on mortgage debt will be limited to the first $750,000 (versus the prior $1 million cap). The impact of this change will be felt most prominently in expensive real estate markets. Additional impact may be realized in instances where the employee maintains two residences during the relocation, as the new limits on deductible mortgage interest and real estate taxes may make certain expenses no longer deductible by the employee.
The availability of below-market interest rates for equity advances may be eliminated. Below-market interest rates are available based on a finding that any interest charged would have been deductible. Based on the new regulations, that finding may no longer be correct. Employers who offer equity advances may be required to impute interest on the loan, and the interest will be considered as compensation for the employee – potentially increasing the employee’s tax liability. We would anticipate that the tax liability on the additional compensation would be minimal, employers will need to determine if they will provide tax support (gross-up).
Additionally, mortgage subsidy programs have, in the past, generally been treated as non-taxable because the subsidy is considered an interest credit. If the interest deduction is lost as a result of the new cap, then the subsidy can no longer be treated as a nontaxable payment, and will be treated as imputed income to the employee.
State and Local Taxes (SALT) remain deductible for individuals who itemize their taxes, however a $10,000 cap has been introduced.
The bill retains moving expense benefits for members of the Armed Forces of the United States military, where the move is due to a permanent change in military status.
These changes will impact program documents, systems and other stakeholders.
Program Documents – all policies will need to be updated along with all program documents, templates and resources that will impacted by the changes.
Systems – relocation company management platforms will need to be updated to accurately reflect the future state approach that each company adopts in response to the new tax rules. Company intranets (or internal reference materials) may need to be updated, as some content will need to be changed and updated documents uploaded.
Other Stakeholders – payroll departments and tax providers will need to be made aware of how these changes will be handled (i.e., gross up methodology).
The 2018 Tax Reform changes are in effect as of January 1, 2018. There are key decisions and activities that need to be completed as soon as possible in order for external partners to best support relocation programs through these changes.
Application of the 2018 Tax Reform and Program Transformation Considerations – determine how to address the changes to the IRS Move Criteria, Taxable Expenses and Tax-Deductible Expenses. The changes may also impact mobility strategy, specifically candidate selection and package pairing.
Impact to In-Process Moves – determine how in-process moves will be handled and any communications that would need to go this population of employees to answer their questions and concerns on how they will be impacted.
Updated Policy and Program Documentation – all policy and program documents impacted by the change will need to be updated.
Year-End Cut-Off Date – If mobility departments currently impose a “cut-off” date with regard to the inclusion of relocation expenses in current year compensation reporting, abandoning the cut-off for 2017 may be considered. It is possible that payments made in 2018, even when related to a 2017 move, may be considered taxable under the new tax guidelines.
Communication Plan – determine what kind of communication plan should be put in place to notify stakeholders of the changes and impacts.