The proposed U.S. tax reform, if approved, will have significant impact on corporate domestic relocation programs.
This blog post was co-authored by Matthew Pascual, Senior Vice President of Weichert Mobility Tax Services.
Under this reform, certain benefit payments that were previously considered excludable from employee income if paid by the employer would become taxable. These expenses fall under 3 categories as follows:
With moving expenses no longer receiving preferential tax treatment, several long-standing tenets of relocation taxation, including the “50-mile distance test” and the “39-week rule” would be dissolved. Of additional interest to corporate relocation managers and mobile employees are changes to the treatment of capital gains on the sale of a primary residence which impose more stringent requirements to be considered excludable.
Although these reforms will likely result in an increase in mobility costs for most companies, workforce mobility will still remain a vital tool for companies to grow their business and attract and develop talent. With that in mind, let’s take a look at one example of how these changes will affect the cost of a move.
The average cost to ship household goods (according to research by Worldwide ERC) is $11,583. With this expense no longer deductible, companies would find it more costly to provide gross-up tax assistance, even though the cost may continue to be deducted as a business expense. For employees, the overall cost of the benefit (including gross-up cost estimated between 60%-70% on average) will be added to their income, increasing the likelihood of being subject to higher tax bracket(s).
To remain an informed consultant to your company’s senior leadership, you’ll need to be armed with data on the long-term and short-term consequences of these proposed changes. Our tax firm, Weichert Mobility Tax Services, is currently monitoring the evolution of this reform and is working on a detailed set of recommendations for our clients.
In the meantime, here are some of the ways these reforms will impact key stakeholders:
To support workforce agility and meet the talent deployment and development needs of your organization, mobility managers should proactively prepare an addendum outlining additional tax benefits the company will subsidize or cover. These may include:
Mobility managers are also well-advised to update cost estimates for each policy tier and advise managers so they’ll better understand the investments they are making in mobile talent and can accurately accrue for these additional expenses.
Given the significant uncertainty associated with this tax reform bill, one of the most important benefits you might provide is tax counseling and tax preparation assistance. This will go a long way toward overcoming the financial fears and anxiety associated with a move.
Develop an advisory notice or policy addendum that advises employees in the middle of a move about the change in law and any impact it may have on their situation. Consider requiring employee signatures to ensure confirmation.
At the end of the day, the best defense against shifting costs—and the most cost-effective way to provide relocation benefits—is by maintaining a compliant homesale program. Over the years, we’ve conducted numerous focus groups and stakeholder surveys that confirm just how much employees value the certainty of knowing they have a buyer for their home and can access equity to finance the purchase of a new home without having to worry about the expense reimbursements or taxes on those reimbursements.
No doubt, moving forward, homesale benefits are likely to become even more important as a tax-favorable way to provide benefits.