The TCJA giveth, and the TCJA taketh away. While many individual and corporate taxpayers benefitted from reduced tax rates and expanded Standard Deductions, there were decided impacts to the talent mobility space for both employers and mobile employees.
Impacts to Taxability
While the repeal of the Federal level moving expense deduction (except for members of the Armed Forces) as part of the 2018 Tax Cuts and Jobs Act (tax reform) continues to impact organizations, there are actually seven states that do not conform to the tax reform and, as such, continue to treat moving expenses as excludable from state income.
Organizations with move activity in Arkansas, California, Hawaii, Massachusetts, New Jersey, New York, and Pennsylvania should take note. Among states that allow moving expense exclusions/deductions, rules can vary. For example, New York and California still allow a moving expense deduction and exclude qualified employer moving expense reimbursements from income on your state return. It’s always a good idea to check with your tax advisor for the most up to date regulations and reporting requirements.
Ensuring your internal payroll and reporting systems are up-to-date to reflect current state tax code will help keep your organization compliant and save your company unnecessary state tax gross-up costs.
Impacts to Repayment Agreements for Both Completed and Delayed Moves
The US TCJA also had everyone talking about the impact on the mobility industry with regard to moving expenses, but many were unaware that the legislation also had an impact on repayment agreements, specifically that relocating employees may no longer deduct expenses repaid to the company under a repayment agreement because of the elimination of the miscellaneous deduction for repayments. This change can have a significant financial impact on the employee, especially given the typical size of a relocation repayment.
For those of you thinking “What about a claim of right?”, the tax code specifies that in order for a repayment to be allowed as a section 1341 tax credit, the income reported and then repaid in a subsequent year would have to have been paid in error, which is clearly not the circumstance with mobility-related expenses and tax payments under a repayment agreement collection scenario.
Employees may have signed an official repayment agreement at the start of their move (i.e., initiation date), but then had their move paused for a material amount of time because of the pandemic or other reasons, making the stated “Effective Date” in these earlier executed agreements questionable. It’s especially questionable if the employee already received a miscellaneous allowance or partial lump sum, and where the employee has already started working “remotely” for the new location.
Consult with your legal and HR counsel for guidance and consider incorporating an amendment (with new signatures for both the employee and company), acknowledging the change in “Effective Date.” The Repayment Agreement Amendment might contain language (subject to company Legal and HR approval) along the lines of:
If I physically delay the start of my relocation for any reason, but start working at my new job remotely, the new “Effective Date” of this repayment agreement will be either: (i) the “physical relocation date”; or, (ii) the “remote start” date, whichever occurs later. Furthermore, I acknowledge that I am responsible for communicating in writing to applicable Human Resources, Payroll, and my Relocation Counselor: (i) any revised Effective Date and, (ii) any revised start date of physical employment in the new location.
This obligation to inform their Mobility Counselor will allow your relocation service provider (and, hey, if it’s not us, maybe it should be) to track dates accordingly and will ensure more accurate reporting downstream.