If you are considering moving to another state, your company may just foot the bill! However, when it comes to taking money for relocation, there is a lot you need to understand to ensure you get the money you deserve and don’t end up losing it all to taxation. So let’s find out how relocation is taxed!
The Tax Cuts and Jobs Act (TCJA) of 2017 changed the way the IRS taxes relocation. Now, both the company and the employee will have to pay tax relocation payment. As an employee, you are required to pay federal and state income taxes on your relocation payout as if it was a part of your yearly income.
When it comes to taxes, there can be a lot of confusing language used. But don’t worry, in this article, we are going to break down how relocation is taxed in a readable and easily understood way so you can plan your relocation with confidence! So keep reading! In the next few minutes, you are going to be a relocation tax expert.
What is Employer-Paid Relocation?
If your company asks you to move, they may offer a relocation payment to subsidize your expenses. There are several types of employer-paid relocation packages such as lump sum, budget managed, reimbursement, or tiered packages.
While each of these options will still be taxed, it’s important to understand that there is an option for your company to cover your taxation costs.
No matter which package your company offers, they can opt to add a “gross-up” payment. This essentially means that whatever you will be taxed on your relocation package, the company will cover it by increasing your bonus.
For example, your employer has agreed that his lump sum package is $5,000 but to cover your tax burden they gross-up your payment to $7,352. If your company does not agree to a gross-up option, you could end up paying up to a third of your relocation bonus to the IRS.
How is Relocation Taxed?
Of the various ways your company can pay you for relocation, the IRS sees the payment in the same way: as non-deductible income.
To make it a little easier to understand, we will use a real-life example. If you make a base salary of $70,000 a year and receive a relocation payment of $5,000 either through a package or reimbursement, the government will see your yearly income as $75,000 and tax you accordingly.
The taxation percentage will depend on which tax bracket you fall into depending on your salary and additional relocation benefits.
What Did the Tax Cuts and Jobs Act (TCJA) Change?
It’s important to note that if you received a relocation benefit before 2017, times have drastically changed.
Only five years ago, relocation expenses paid by employers were seen as a special bonus expense under the IRS tax code for both employers and employees. That meant that neither the employer nor the employee was required to pay additional tax on certain relocation packages.
However, when the TCJA came into effect on January 1, 2018, relocation expenses and deductions were eliminated altogether.
Besides asking your employer for a gross-up option on your relocation payment, there is no way to escape paying federal and state taxes on a relocation bonus.
As an employee, it is highly recommended that when receiving your company’s relocation offer, you ask for a gross-up supplemental payment in order to avoid using a large part of your so-called bonus to pay the IRS.
Overall, the TCJA made relocation more expensive for both companies and their employees, and there is no way around it, someone will have to pay the tax on this money.
NOTE: Some companies have avoided relocation taxation by using BVO/GBO homesale programs. However, these processes require a lot more effort from the company’s side, and in order to provide this detailed service, there needs to be a long-term plan in place for the employee’s retainment at the company.
In regards to relocation, the payout isn’t quite as impressive as it used to be. While companies across the USA and even the world are still apt to present a relocation package to their employees, the new taxation bill Tax Cuts and Jobs Act (TCJA) has made the entire process much more expensive.
Just to recap, relocation packages are taxed as annual income. If your company offers payment for relocation, you will need to pay federal and state taxes at the end of the fiscal year.
The only way to avoid paying these fees out of your own pocket is to insist that your company offers a “gross-up” payment which essentially means they account for the taxation and pay you what you will be taxed to cover the costs.