Is the relocation package taxed? This article will help you understand how relocation taxes affect both the business and the employee.
Is the relocation package taxed?
Employee relocation expenditures paid by an employer (other than BVO/GBO home sale schemes) are all deemed taxable income by the IRS and state authorities (and by local governments that levy an income tax). This covers transportation for home goods, temporary living expenditures, incidental allowances, lump sum payments, and other benefits.
Before the passage of the Tax Cuts and Jobs Act of 2017, the Internal Revenue Service allowed taxpayers to deduct certain relocation expenditures while excluding employer reimbursements for qualifying moving expenses. Except for active duty military force personnel, certain deductions and exclusions are no longer permitted. This legislation went into effect for the 2017 tax year and is due to expire in 2026.
A person can relocate within the country as well as outside the country.
What is Relocation Tax?
Relocation packages cover or defray the costs of migrating to a new job location. In a tight labor market, employers may give these incentives to recruits as an incentive to sign on. Employees transferring from one location to another may potentially be eligible for relocation benefits.
These expenses could include the following:
- Moving and packing
- Short-term or long-term housing Storage
- Insurance for relocation
- Assistance with finding work for your spouse
- Purchase/sale of a home
- Assistance with taxes
Although some relocation packages cover the whole expense of a move, from packing and moving your belongings to plane tickets for your family and pets, many just provide a flat sum benefit or limited reimbursement.
Employers may offer one of four types of relocation packages:
- A lump payment is money given to you by your company to assist pay for your transfer; you select how to spend it.
- Reimbursement: Your company pays for qualified moving expenses up to a specific amount.
- Direct payment means that your employer pays for your moving expenditures directly, usually through pre-selected or approved vendors.
- Relocation services: Your employer may hire a relocation service to assist you with your move. Relocation consultants can help you organize movers, find temporary lodging, book aircraft tickets, and much more.
What Has Changed Regarding the Relocation Tax?
Employee relocation perks were not considered taxable income before the Tax Cuts and Jobs Act of 2017. Employers could also deduct relocation costs if they relocated their staff. Employees must now pay tax on any benefits they obtain as a result of the new legislation, and companies may no longer use the relocation as a tax deduction. However, there are smarter methods to work to guarantee that an employer is tax compliant and that an employee is not stung, resulting in a seamless and quick relocation process.
Relocation Lump Sum Tax
A lump sum payment is when an employer gives the employee cash or a cheque up front to cover the expense of their move. The employee is responsible for paying taxes on the money they get because it is considered additional income on top of their compensation.
For example, if a salary of $80,000 is paid and a lump sum of $10,000 is given, the earnings for that year are recognized as $90,000. The employee would have to pay not only their income tax bill on their wage but also a percentage of tax on the lump sum.
Some employers choose to provide tax assistance, aka “gross up” – more on that shortly – but, if they do not, the employee’s relocation costs could increase to take into account the tax bill they have coming their way.
Tax Brackets and Federal Tax Income depend on various factors:
- Filing Status
- Location (city and/or state)
Can moving expenses be deducted from your taxes?
Your new company has provided you with a relocation benefit to help with the cost of your relocation. You spent a lot more money to relocate yourself and your family. Is it possible to deduct unreimbursed moving expenses?
Moving expenses are often not tax deductible, owing to the TCJA. Moving expenses are not deductible on federal taxes until 2025 unless you are an active-duty military member being ordered to a new permanent location. If you are an active-duty military member and believe you may be eligible for this deduction, check IRS Form 3903.
Only a few states still allow eligible moving expenses to be deducted from state income taxes. Though regulations vary by state, typical deductions include the cost of moving services, travel and mileage, storage, and other expenses incurred when you relocate out of commuting distance for your employment. Commuting distance is sometimes described as 50 miles plus the distance of your existing commute. The following states provide certain tax breaks for eligible moving expenses:
- Arkansas \sCalifornia
- The state of New Jersey
- Pennsylvania is a state in New York.
For further information on claiming a deduction for moving expenditures in your state, contact your state taxing body or a tax expert.
Receiving financial assistance from your employer can make a job-related relocation easier to manage. However, if your employer provides a relocation package or a smaller lump sum for moving expenses, make sure you are aware of the taxed ramifications. Your company may agree to increase your relocation funds to pay your taxes. If not, you may end up with less money after taxes to cover the costs of your relocation.
Having your money in order is essential while moving. Major financial duties include managing your relocation budget, covering reimbursable charges, selling and purchasing a property (or negotiating your way out of an old lease and into a new one), and accounting for your employer’s aid and its tax implications. Throughout the process, good credit can assist you in obtaining rental approval or the best prices and conditions on everything from credit cards to house loans. You may check your credit report and score on Experian at any time for free to better understand your alternatives as you plan your move.