Prior to 2018, certain moving expenses were deductible against adjusted gross income if the move was related to the employee’s work and the distance was 50 miles further from the previous place of employment. Many employers had a policy that reimbursed employees for these moving expenses on a tax free basis.
Changes in Moving Expense Deduction Under the New Tax Law
Under the Tax Cuts and Jobs Act (“TCJA”), the deduction for moving expenses and the exclusion from gross income for qualified moving expense reimbursements is suspended. The new provision is applicable to expenses and reimbursements after December 31, 2017 and before January 1, 2026. The change, however, does not apply to active duty members of the Armed Forces who move pursuant to a military order and incident to a permanent change of station.
We are awaiting further guidance from the Treasury as to whether relief will be provided to those who incurred moving expenses in 2017 that were reimbursed in 2018. Previously, the employee would not report any deduction or income related to the qualified moving expense reimbursement. Alternatively, an election was available to deduct the costs in the same taxable year that they were reimbursed.
If no guidance is given, one alternative would be to deduct the expenses in 2017 and recognize the reimbursement in 2018. This, however, may result in an additional FICA tax burden on both the employer and employee in 2018. Employers will have to account for these increased costs associated with providing relocation benefits on a tax free basis.
For multi-national corporations with globally mobile employees coming to the United States, it may be advisable to have a moving expense allowance paid before entry into the U.S., provided it is tax efficient from a home country perspective. In that event, the U.S. will most likely not look to tax the allowance if paid by the foreign company and not recharged to the U.S. company.
As a result of the TCJA, employment contracts and secondment agreements for expatriates effective after December 31, 2017 will need to be re-evaluated to take into account the moving expense provision.
Other Types of Employee-Related Expenses Disallowed
In addition, many multi-national companies cover the cost of tax and advisory fees for their employees. The cost of these tax and advisory fees was previously included in the employee’s taxable income as compensation and the employee was able to deduct these costs as miscellaneous itemized deductions subject to certain limitations.
As the new tax law now disallows the miscellaneous itemized deduction, employees will be required to report this benefit as income, without the corresponding deduction. Likewise, the deduction for employee business expenses is no longer available.
Please contact your Mazars USA LLP professional for additional information.