9 Transferee Tax Concerns Every Human Resource Director Should Know
There are countless moving parts involved in relocation taxes. Each state enforces unique tax laws, meaning a transferee will be met with an intimidating amount of intricacies to consider when filing their taxes.
Understanding the uniqueness of individual state tax laws and relocation taxes means your company can set the correct expectations of how an employee’s finances will be impacted by their relocation. These expectations should allow a transferee to feel confident about their relocation and remove the possibility of being surprised by unplanned expenses or tax compliance issues.
If companies are interested in retaining employees and attracting talent, it’s recommended that they assume the responsibility of educating their employees about relocation taxes. A transferee will undoubtedly have many questions, some of which can be answered by talking through these points:
Suggested Tax Topics to Address with a Transferee
- Company relocation policy.
Having a comprehensive, informative relocation policy removes much of the guesswork that may arise during the transfer process. Policy transparency may also impact a potential transferee’s decision to accept a relocation offer. Policies can be both explanatory and enticing, highlighting the advantages of relocating while reinforcing a transferee’s sense of security in their choice to relocate. A company policy should answer such questions as:
- What tax liabilities and obligations does the transferee assume and what responsibilities belong to the company?
- What is included and excluded in the company’s relocation benefits package?
- Will the company cover moving costs directly or will the transferee be required to submit receipts and receive a reimbursement check?
- Will the company be providing a relocation gross-up to offset the employee’s tax obligation?
- What are the taxability, deductibility, and excludability status of their moving expenses?
Clearly communicating your relocation policy will also ensure that your company avoids unnecessary compliance liability risks.
- Short-term relocations vs. permanent relocation.
The duration of an employee’s assignment affects the taxable presence of the employee and the overall relocation cost for your company. For example: the length of an international assignment may trigger host country income tax obligations, influence the taxable status of lodging and per diem reimbursements, and affect the applicability of your tax equalization policy. Similarly, the length of a stateside relocation may determine the domicile and residency status of a transferee, even if their permanent home is in another state.
- Timing the switchover of state withholding.
The length of a stateside relocation may impact transferee liabilities, depending on local tax laws and relocation length. A transferee may be liable for filing part-year tax returns in both states, based on percentages of income earned in the respective states. Bear in mind that taxes become nuanced when two parties are involved— especially when one party resides in a different state than the other.
Transferees can update their state tax withholding status throughout the year, providing their employer with an updated state withholding certificate no later than December 1st; if the date falls beyond December 1st, the certificate must be supplied 10 days after the effective change.
- Changing withholding statuses on a withholding certificate.
When a job requires relocation, it’s wise for an employee to revisit their withholding certificate, as major life changes affect a person’s tax liability status. The amount withheld may need to be decreased in consideration of a salary increase, due to relocation or other income factors. Revising a transferee’s withholding status may help prevent thinner paychecks due to overpayment or disappointing underpayment penalties.
- Renting or selling a house and acquiring accommodations in a new location.
Tax considerations for transferees may include converting a primary residence to an investment property, the tax implications of owning two homes in separate states, and tax concerns for renting or purchasing accommodations during their assignment. If the transferee decides to sell their primary residence and profits from the sale of their home, they may be required to pay capital gain taxes, which necessitates correctly reporting the proceeds to the IRS.
- Timing of capital gains and losses.
Capital losses, such as decreased real estate value when selling a house, might be a factor in a transferee’s decision to relocate. Taking an inventory of their capital assets, such as stocks and bonds, property, and vehicles can positively offset potential capital losses and may sway a transferee’s decision to accept a relocation.
Capital gains are taxable at both federal and state levels; state tax rates are dependent on location. The length of time a transferee has held an asset will also subject their capital gains to different taxable percentages. These factors are important considerations for transferees and employers alike, as they can make relocation compensation packages more costly.
- Personal income tax preparation process.
Explaining the necessary steps and information required to successfully file personal income taxes can relieve a significant amount of stress for a transferee. Assisting a transferee in organizing financial records and receipts, locating and completing relevant forms, and providing necessary tax documents makes for a smooth filing process. Be sure to also iterate important filing and extension deadlines.
- Supplemental Tax Rates vs. Marginal Tax Rates.
Marginal tax brackets define the taxable income of the transferee, but different states are subject to variable bracket rates. Determining these rates is crucial, as taxes must be withheld if the transferee has relocated to a state with income tax.
As with marginal tax rates, supplemental tax rates are also state-specific. Supplemental tax rates warrant additional attention in the case of employee mobility, as non-deductible moving expenses fall under this category.
- Special tax credits.
Filing a successful tax return is contingent on a transferee knowing the appropriate state and local tax credits. Though federally eligible credits will likely remain the same, credits such as state-earned income tax vary in percentage and refund eligibility depending on location. Incentives such as efficient energy initiatives, property ownership, higher education credits, and local disaster recovery credits are also specific to the state.
While this overview of suggested tax talking points will provide you with the groundwork for your discussion with a potential transferee, differentiating tax situations means some concerns and topics will likely arise that are best answered by a tax consulting service. Enlisting the assistance of a relocation tax consulting service is a guaranteed game-changer in relieving unnecessary confusion for both the transferee and your company.
Ineo’s tax consultation services provide the know-how and bespoke support necessary to ensure continued tax compliance and your transferee’s satisfaction with their relocation experience.