Relocation Travel Expenses: Taxable Or Not?

Relocating for work can be an exciting yet stressful time. One of the most important considerations is the cost of moving, and whether any financial assistance is available from your employer. While some companies offer relocation packages, it's important to understand the tax implications, as these can vary depending on your location and individual circumstances. In this article, we will explore the topic of relocation expenses and answer the question: are relocation travel expenses taxable?

Are relocation expenses taxable for the employee?

Yes, relocation expenses are taxable for employees. The IRS and state authorities consider these expenses as taxable income, which includes household goods transportation, temporary living expenses, miscellaneous allowances, lump-sum payments, and more. This means that employees will have to pay taxes on the total amount received, in addition to their annual salary.

Tax Laws and Deductions

Prior to the Tax Cuts and Jobs Act of 2017, employees were allowed to deduct qualified moving expenses from their taxes and exclude reimbursements provided by their employers. However, with the passing of this Act, employees are no longer eligible to deduct unreimbursed business expenses, except for active-duty military personnel who are ordered to a new permanent station.

Impact on Employees

The tax impact on relocating employees will depend on their tax bracket and place of residence. The amount an employer pays in relocation expenses, whether directly or on the employee's behalf, is added to the employee's annual income, resulting in higher taxes.

Strategies to Alleviate Tax Burden

To offset the additional tax burden on employees, employers often employ a strategy known as "tax gross-up" or "grossing up." This involves increasing the compensation provided to the employee to cover the additional taxes incurred due to relocation benefits. By doing so, employers ensure that employees receive the full intended compensation after taxes, making the relocation package more attractive.

Communication and Transparency

It is crucial for employers to communicate the tax implications of relocation benefits clearly and proactively to their employees. This helps employees navigate their financial responsibilities effectively and minimizes potential unexpected tax burdens during the relocation process.

State-Specific Provisions

While federal tax deductions for moving expenses are currently unavailable for most individuals, some states have retained the ability for residents to claim deductions for moving expenses on their state income tax returns. These state-specific provisions can provide some financial relief in the absence of federal deductions.

Global Mobility Tax

For employees relocating internationally, the tax implications become even more complex. They may be subject to double taxation, paying taxes in both their home and host countries. To alleviate this burden, some countries have bilateral tax treaties in place. Navigating these intricacies requires a nuanced understanding of the tax codes in both the host and home countries.

Are relocation expenses tax-deductible for the employer?

In the UK, relocation costs can be taxable, but certain costs are exempt from tax under HMRC guidelines, provided they meet specific criteria and are within the £8,000 limit. These are known as 'qualifying costs' and include:

• The costs of selling and/or buying a property
• The costs of the actual move
• The costs of transport
• Money spent on purchasing items for the new home
• Bridging loans, which are needed if the employee has to take out a loan to help pay for a new property while waiting for the sale of their current property to go through

For a bridging loan to count as a qualifying cost, the employee (or their family) must sell their old home and buy a new one, and the loan must be used only to buy the new house or pay off loans relating to the old home. It cannot be for more than the market value of the old home at the time the new home is bought.

In the US, the answer depends on the individual's situation. Military personnel can claim moving deductions against their taxable income, but most taxpayers cannot deduct moving expenses for tax years 2018-2025. However, if you moved prior to 2018, you may be able to amend a previous return to deduct your moving expenses.

What is the tax gross-up method?

The tax gross-up method is a strategy used by employers to alleviate the tax burden on employees arising from taxable relocation expenses, reimbursements, and managed relocations. It involves increasing the amount of compensation provided to an employee to cover the additional taxes incurred due to the relocation benefits. This ensures that the employee receives a net amount after taxes, effectively neutralizing the impact of taxation on their take-home pay.

The process of grossing up is relatively straightforward. The employer calculates the applicable federal and state tax rate and then divides the relocation benefit by the net percentage (100% minus the tax rate). This results in a grossed-up amount that, after taxes, will leave the employee with the intended compensation. For example, if an employee is entitled to a $10,000 relocation bonus and the combined federal and state tax rate is 25%, the employer would gross up the bonus by dividing it by the net percentage (75%). In this case, the grossed-up bonus would be $13,333.33 ($10,000 / 0.75), ensuring the employee receives the full $10,000 after taxes.

The use of the tax gross-up method demonstrates an employer's commitment to reducing the financial impact of taxes on their employees and can serve as a powerful incentive for employees to accept job offers or agree to relocations. It fosters a positive work environment, enhances employee satisfaction, and contributes to reduced turnover rates.

However, it is important to note that grossing up expenses can add a significant cost burden to employers, typically increasing taxable relocation costs by 55% or more. Additionally, employers should be cautious when offering relocation bonuses to avoid inadvertently pushing employees into higher tax brackets, which could result in higher tax liabilities for the employee. Careful consideration and transparent communication regarding the gross-up process are crucial for a smooth relocation experience and a contented workforce.

How do relocation expenses affect an employee's tax bracket?

Relocation expenses can significantly impact an employee's tax bracket, and it is important to understand the tax implications before making any decisions about relocating.

Prior to 2018, employees could benefit from tax deductions on specific moving expenses if they met certain criteria, such as the Time and Distance tests. However, the tax landscape has changed, and now relocation expenses are generally considered taxable income. This means that any amount an employer pays to cover an employee's relocation expenses is added to the employee's taxable income, resulting in a higher tax liability.

For example, let's consider an employee with an annual salary of $75,000 who receives a $5,000 bonus and a $10,000 lump sum from their employer to cover relocation costs. Their total taxable income for the year would be $90,000, and they would owe federal, state, and sometimes local taxes on the bonus and lump sum as ordinary income. This could potentially push them into a higher tax bracket, resulting in a higher tax bill.

To offset this tax burden, some employers may choose to "gross up" the relocation benefits they offer. This means they will provide an additional payment to cover the extra taxes due on the relocation benefits, ensuring that the employee receives the full expected benefit. However, employers are not obliged to do this, and even with grossing up, the tax burden simply shifts to the employer.

It is worth noting that there are some exceptions to the taxability of relocation expenses. For instance, members of the armed forces undergoing service-related relocations may still be eligible for certain moving expense deductions. Additionally, some states allow deductions for qualified moving expenses on state income taxes, providing some relief in the absence of federal deductions.

Overall, it is crucial for both employers and employees to understand the tax implications of relocation expenses and how they can impact an employee's tax bracket. Clear communication and careful consideration of the tax landscape can help ensure a smooth and financially sound relocation process.

What are the tax implications of a relocation lump sum bonus?

A relocation lump-sum bonus is considered taxable income for the employee. This means that the bonus, when added to the individual’s regular income, contributes to their total taxable income for the respective tax year. For example, if an employee receives a relocation bonus of $10,000 and has an annual salary of $130,000, their total taxable income for the year would be $140,000.

It is important for employers to communicate the tax implications of relocation bonuses clearly to their employees. Failing to do so may lead to unforeseen tax burdens, potential dissatisfaction, and financial stress for the relocating employees. Transparent communication ensures a smoother relocation process for both the employer and the employee.

In the case of a relocation lump-sum bonus, the employee is responsible for paying the tax on the bonus, known as the relocation lump-sum tax. This tax is treated as additional income on top of their salary, and the employee will need to pay a percentage of tax on the bonus. For instance, if an employee receives a $3,000 relocation bonus and the collective tax rate is 30%, $900 will be deducted from the bonus to cover the tax, resulting in the employee receiving only $2,100.

To alleviate the tax burden on employees, some employers may choose to provide tax assistance, also known as a "gross-up". This involves increasing the compensation provided to the employee to cover the additional taxes incurred due to the relocation bonus. For example, suppose an employee is entitled to a $10,000 relocation bonus, and the combined federal and state tax rate is 25%. To ensure the employee receives the full $10,000 after taxes, the employer would divide the bonus by the net percentage (75%, assuming 100% - 25% tax rate), resulting in a grossed-up bonus of $13,333.

Prior to 2018, when the Tax Cuts and Jobs Act went into effect, relocating employees could benefit from tax deductions on specific moving expenses. To be eligible for these deductions, employees had to pass both the Time Test and the Distance Test. The Time Test required employees to work full-time near their new job location for a minimum of 39 weeks within the first 12 months following the move. The Distance Test mandated that the new workplace must be at least 50 miles farther from the old residence than the previous workplace. Under these criteria, certain moving expenses, such as the transport of household goods, travel expenses, and storage of household goods, were tax-deductible.

However, the 2018 tax law eliminated these deductions, making relocation expenses, including lump-sum bonuses, taxable. These rules are currently in effect until at least the 2025 tax year, after which they are set to expire.

Frequently asked questions