In today’s tight labor market, your business may want to perk up its compensation package to attract and retain in-demand employees. For example, you might offer moving expense reimbursements or other relocation payments to lure job candidates from afar. Under current law, moving expense payments can’t be deducted by employees or excluded from tax. However, employers can continue to deduct these taxable amounts as business expenses.
That Was Then
Prior to the Tax Cuts and Jobs Act (TCJA), individuals who moved for their jobs could write off unreimbursed moving expenses on their income tax returns. The expenses were deductible even if the employee didn’t itemize and they were “above the line,” meaning they reduced adjusted gross income (AGI). To qualify for a deduction, individuals had to meet specific requirements involving distance and time. These moving expenses were deducted separately from other “miscellaneous” unreimbursed employee business expenses.
Employers could also provide payments for employee moving expenses with an accountable plan. To qualify for accountable plan reimbursements, employees had to provide proof of expenses through receipts and return any excess to their employers. Under these plans, moving reimbursements were exempt from tax and there was no specific dollar limit on the tax exemption.
Other payments, such as those made under a nonaccountable plan or excess reimbursements that weren’t returned, were treated as taxable compensation. Accordingly, they were subject to income and payroll taxes and were reported on employee W-2 forms. But employers could deduct taxable reimbursements or payments made on behalf of employees as “ordinary and necessary” business expenses.
This is Now
The TCJA dramatically changed how moving expenses are treated for tax purposes in two important ways:
- Starting in 2018, the law suspended personal deductions for moving expenses. Now through 2025 (unless Congress acts), employees can’t deduct moving costs on their income tax return. Note one exception: The deduction suspension doesn’t apply to military personnel on active duty. These individuals can continue to deduct moving expenses just as they did prior to the TCJA.
- The law prohibits moving expense reimbursements under employer accountable plans (again, except for qualified military personnel). This suspension is also scheduled to last through 2025.
Fortunately, TCJA provisions didn’t change the employer deduction for moving expense reimbursements. This potential business deduction continues to provide an incentive for employers to offer packages to job candidates who must move to accept a position.
Of course, the law might change again. Some elected officials have talked about renewing the moving expense deduction and tax exclusion for moving expense reimbursements sooner than 2025 (along with other TCJA provisions set to expire then). And some legislators advocate making these provisions permanent. Of course, the results of the 2024 elections will likely have a significant impact. But for now, both employers and employees should recognize that reinstatement looms at the start of 2026, barring any further congressional action.
Compensating for Tax Liability
You have several options in the current tax environment. For one thing, you can make moving cost payments to employees using a nonaccountable plan. These payments will be subject to income and payroll taxes and the taxable amounts must be reported to the IRS. If you make payments under an accountable plan, they’re also taxable to employees in 2024 and 2025. However, your organization can deduct these payments as business expenses under both scenarios.
Because moving will represent a tax liability for employees, you may want to provide them with an incentive to move. For example, you could “gross up” compensation, increase an employee’s salary or provide a bonus to offset tax that will be applied to any moving cost reimbursement.
One relatively simple way to do this is to multiply the moving cost payment you intend to make by the employee’s estimated top tax bracket. Then add that amount to the total moving payment.
For instance, say you plan to give a newly hired software designer $5,000 to cover moving expenses from Ohio to Michigan and you estimate that the employee is in the 24% tax bracket. Multiply $5,000 by 24%, and then add the result — in this case, $1,200 — to the initial payment. In our example, the total payment of $6,200 ($5,000 + $1,200) effectively makes the employee “whole.”
Include Current Employees
You shouldn’t offer extra compensation to cover employee tax liability associated with moving cost reimbursements only to prospective workers. Keep current employees informed about any changes in your moving expense reimbursement plan and revise your employee handbook to reflect them. This can help employees who must move understand their tax responsibility and help you retain good employees. Your professional advisors can assist you in making these changes.
@2024