The decision to move an employee is a complex one for a corporation. The financial expense must justify the end goal, whether that goal is to open a new regional office, work with a brand-new client base in a different country or complete a long-term technical project in another state. When you factor in all the components that make a move successful, it can become overwhelming. Moving not only involves the physical logistics of relocating the employee from his old location to the new location, seeing that his household goods arrive safely, helping the employee sell his old home and buy a new home, but there are often overlooked financial and tax implications. A corporate relocation package has many financial benefits to the employee but the tax ramifications to the employee and the employer need to be addressed before, during and after the move to facilitate compliance with state, federal, city and foreign country payroll, and tax regulations.
Besides using a tax advisor to keep your company and your employees compliant; below are our top 10 tax tips intended for your use before, during, and after a move.
1. The employee’s taxable income will be increased by the relocation expenses paid by the company. Make certain that federal and state withholdings are enough to cover the increase. In addition, the year after the move, most transferees are likely to be under-withheld (see item 10). If in doubt, contact your tax advisor.
2. Make sure that a W-4 form has been prepared and provided to your payroll department so that the correct state withholding is being taken. You are required to have withholding taken in the state that your employee works in, even if they are a resident of another state! This should be in effect for the first paycheck received in the new place of employment. Extremely important for College New Hires and those moving from a state with an income tax to a state without any income tax.
3. In addition to the state, the new city may also require tax to be withheld. Review your employee’s first pay stub to make sure that this is being done (if applicable).
4. Keep in mind that excess FICA withheld from two or more employers is refundable, Schedule 5, Line 72. Then the numbers from Schedule 5 get transferred to IRS tax form 1040 Line 17. This affects both working spouses.
5. Significant moving expense deductions are still available in 7 different states in the tax year 2019. No federal moving expense deductions are available. The only exception is for certain military moves.
6. Specific expenses, unique to each employee, in those 7 states are also deductible as moving expenses These include; the relocation of pets, including horses and aquariums, and tips paid to “movers & packers”. There is no limit on the number of cars that can be moved and deducted. Rental Losses can be carried forward.
7. The cost of moving students, from their college to the new job location, is still deductible in 7 states in the tax year 2019. Plus, in most cases a $500 dependent credit is also available, assuming AGI is under $400,000.
8. In the year that your employee moves, any non-amortized points on a refinanced loan can be deducted on the sale of the old residence.
9. The year of a move, income is inflated, and this is probably not a good time to take an early distribution. Premature distributions from pension plans are not only taxable as income but incur a 10% penalty unless rolled over within 60 days. Both qualified and non-qualified stock options need to be accounted for, taking into consideration the various states involved. Overpaying taxes on stock options is a significant issue for many transferees.
10. Significant potential for under-withholding penalties exist in the year after the move, It may well be hard to meet any of the safe harbor rules: Owe <$1,000, or pay at least 100% of last year’s liability, if AGI is >$150k, then pay 110% of last year’s liability. This issue is always discussed during a pre-move tax consultation.
Ineo has professional tax advisors to answer any questions you or your employees may have regarding relocation issues for the year of and the year after their move. We provide peace of mind to mobility professionals by making sure that their programs are tax compliant and their relocated employees educated about the income tax implications of their corporate move and the tax impact on the employees’ state, federal and country returns. Navigating the constantly changing tax laws from state to state and country to country is our business. Reach out today for a free consultation with one of our tax experts and learn how we can help with your mobility program’s success.