Tax Reform Affects on Moving Expenses

There has been significant discussion and debate in Washington regarding new tax proposals.  Below is an update provided by Worldwide ERC® on what is being considered in current legislation. While this is not final and will likely go through more iterations, we wanted to keep you updated on current events as they affect relocation. <!--break-->

While the elimination of the moving expense deduction would increase costs for corporations, it may also be that an overall corporate tax reduction may mitigate the elimination of certain specific tax breaks. So, it is still too soon to determine what the final outcome will be. 

Senate Finance Committee Tax Reform Plan Repeals Moving Expense Deduction, Affects Other Mobility Provisions

On Thursday, November 9, 2017, Republicans on the Senate Finance Committee released details of their tax reform plan.  Although no legislative language has yet been made available, a lengthy summary by the Joint Committee on Taxation fills in many of the details.

Like the House Republican plan released earlier this week, unfortunately the Senate plan repeals the moving expense deduction, and the exclusion for moving expenses paid or reimbursed by an employer, effective January 1, 2018.  There is an exception for expenses of members of the Armed Forces who move pursuant to a military order, incident to a permanent change of station.  (A similar change was made to the House bill, which was voted out of Committee on November 9 and now goes to the full House for a vote.  That vote is expected the week of November 13).

"Repeal of the moving expense provisions would greatly increase gross-ups," said Peggy Smith, SCRP, SGMS-T, Worldwide ERC® president and CEO. "Previously excludable payments would now be taxable, although the employer could continue to deduct them as business expenses on its own return. And for those companies that tax protect for relocation expenses, they would not only owe taxes on the moving expenses themselves, but on the tax protection payments."

Although both House and Senate bills reduce rates and increase the thresholds at which particular rates apply, it is not unlikely that some employees would be moved into a higher tax bracket.  Worldwide ERC® calculates that the additional gross-up could reach as much as $2 billion per year for American businesses, as well as an additional $150 million per year for the federal government.  Companies will face pressure to reduce the number of moves to offset the additional costs.

Other mobility-related provisions affected:

• Unlike the House bill, the Senate bill completely repeals all individual deductions for state and local taxes, including property taxes.  (The House bill would allow $10,000 for property taxes).
• Senate bill would retain full deductibility of the mortgage interest, subject to current law limitations.  (The House plan would reduce from $1 million to $500,000 the amount of the mortgage interest deduction).  However, no deduction would be allowed for home equity indebtedness.   
• The bill would also repeal any deduction for miscellaneous itemized deductions such as unreimbursed business travel and employment expenses.

Smith noted, "The bill would also significantly modify the exclusion for gain on the sale of a principal residence.  The taxpayer would have had to have owned and used the home as a principal residence for five of the eight years preceding its sale, as opposed to two of the five preceding years.  Although there would still be an exception for sales caused by a move, the amount excludable would be considerably less."

Consequently, Worldwide ERC® members can expect greatly increased costs if the Republican tax plans are enacted. "There is one piece of good news," said Smith. "Neither bill proposes elimination of the current exclusion for foreign earned income and housing costs.  Expats and their employers would be unaffected."

Worldwide ERC® has worked in close partnership with the American Moving and Storage Association (AMSA) toward favorable legislation, and has jointly produced "The Tax Treatment of Moving Costs" with AMSA. Smith noted, "Though both of our organizations continue to work together and individually to reverse these proposals, it is wise for Worldwide ERC® members to begin considering their courses of action if they pass."   

About Worldwide ERC®

Since 1964, Worldwide ERC® has been committed to connecting and educating workforce mobility professionals across the globe. A global not-for-profit organization, we are headquartered in Washington, D.C., with offices in London and Shanghai, and are the source of global mobility knowledge and innovation in talent management from Europe, the Middle East and Africa, to Asia and across the Americas. For more information, visit www.WorldwideERC.org.