Proposed 2018 U.S. Senate Tax Reform and Potential Implications for Your Relocation Program
by Jill McDonald & Kathy Burrows | November 28, 2017
Individuals involved in relocation activities have been anxiously waiting updates regarding the U.S. Senate Tax Reform that was approved by the House on November 16, 2017. The Senate approved the plan (with some differences) on December 2, 2017; both plans must be reconciled before they are put in front of the president. The proposed legislation includes items that could have an impact on US domestic relocation programs and global relocation programs where employees are subject to taxes in the US. The final ruling would take effect on January 1, 2018. Despite the uncertainty of the outcome, mobility teams are encouraged to begin evaluating how the tax reform may impact relocation program policies, process and employees. Potential impacts include:
- Increased program costs
- Changes to program administration requirements
- Workforce planning adjustmentssi
Employees may see their personal finances impacted, which may affect their ability or willingness to relocate in the future. Here is a summary of what we know so far:
Excludable Expenses. Proposed changes would eliminate the excludable relocation expenses that programs have come to rely on such as:
- Movement of household goods
- Storage up to 30 days
- Final trip lodging, airfare and mileage up to the IRS tax excludable moving rate
The criteria that the Internal Revenue Service (IRS) previously used to determine excludable expenses will no longer be relevant, and companies will no longer be required to track or enforce the following:
- Timing of the move related to work start date
- The distance test: commuting distance from current (old) residence to the new place of employment (50-mile rule)
- The time test: If the individual is an employee, they must work full-time for at least 39 weeks during the first 12 months following arrival in the general are of the new job location. If the employee is self-employed, they 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 arrival in the general area of the new work location.
Companies will need to decide how they will treat these expenses going forward. They may choose to:
- Gross up the expense; or
- Hold the employee responsible for the taxes on one or more benefit components
Deductible Expenses. The proposed bill would no longer allow employees to deduct certain relocation expenses on their income tax returns. Companies will need to decide if they will now gross up those expenses or if the employee will be personally responsible for the incremental liabilities. Deductible expenses policy may include:
- Mortgage interest and taxes (see additional detail below)
- Points (new home purchase benefit)
Capital Gains. The proposed bill would still allow a homeowner to exclude the gain on sale, but the limitations may change:
- Owner occupied for five out of eight years prior to the sale (up from two out of five years).
- The exclusion has a cap for individuals with Adjusted Gross Income (AGI) of $500,000 (married filing jointly) or $250,000 (single).
Some employees may be unwilling or unable financially to move if the gain on sale is cost prohibitive.
Mortgage Interest Deduction. The House bill reduces the cap on the ability to deduct mortgage interest from the first $1,000,000 in house value to $500,000. The Senate bill does not change the current $1,000,000 cap. Depending on what is negotiated, this could impact the general ability to deduct interest. Homeowners will also no longer be able to deduct interest for home equity loans or second homes.
Lower Tax Rates; Fewer Tax Brackets. Both the House and Senate bills contain fewer tax brackets and lower tax rates. Depending on the final bracket mix and tax rates, this could impact the gross-up calculations and values as lower tax rates and fewer brackets may reduce gross-up costs. Companies may want to consider reviewing their current tax gross-up methodology to ensure it is meeting company objectives given the changes to the tax code.
Home Sale Programs. Because the home sale benefit is not a tax code benefit but is based upon the IRS’ legal interpretation of a bona fide home sale, the tax reform bill does not impact home sale benefits. There is no indication that the IRS plans to reevaluate the efficacy of a home sale program so the home sale program still maintains its tax benefit.
Understanding Cost Impacts to Your Programs. It will be important to understand how overall costs will be impacted should you decide to cover gross-up for relocation expenses that are no longer excludable or deductible.
Approvals for Changes to your Program. Any proposed changes to your program based on the tax ruling will more than likely need to go through stakeholder review and approvals within your company. It is recommended to evaluate your own internal processes, identify your key stakeholders and begin to have discussions about the pending changes so your approval process can move quickly.
In-Process Moves. Consider impacts to in-process moves that have relocation expenses impacted by the tax reform ruling. New cost projections may be necessary to understand the financial impact, move budgets, accruals and approvals may be necessary. Relocation letters or agreements may need to be updated to reflect changes to the benefits the employee is receiving. Business lines, managers and recruiters will need to understand the impacts for the employee and their budgets.
Updating your Program Documentation. Program documentation, tax charts and policies will need to be updated to reflect program benefits changes and guidelines that will no longer be in effect or relevant in overall program governance.
Year End Impacts. Consider potential employee and company impacts as a result of blackouts, cutoffs and incurred expenses that have not yet been recognized that will be pushed into 2018. Consider evaluating impacts and options for modifying year end processes this year to limit liabilities.
Gross-Up Methodology. Consider reviewing current gross up mythology to ensure it is meeting company objectives given the changes to the tax code.
Talking Points. Consider your company’s message to stakeholders and ensure your team is able to articulate the change that is happening and provide the support that the business will need during the time of transition.
Communication Plan. Develop a communication plan on how these changes will be communicated to key stakeholders, other vendors touching relocation and employees who are in the middle of their moves. Specific training and information sessions will be key in communicating the changes.
Talent Management Considerations. Proactively develop a strategy with talent management and recruiting to address potential talent retention and recruiting barriers that could result from the tax reform. Understand that some key talent may be unwilling or financially unable to relocate under certain circumstances.