Proposed U.S. Federal Tax Reform Legislation and Potential Impact on Mobility
Posted by: Wendy Kosach, Senior Vice President, Relocation Accounting Services in collaboration with David S. Oltman, Chief Compliance Officer, Ineo, LLC
While nothing is certain yet, this post is intended to provide you with information, as it stands now, on the still evolving U.S. Federal tax reform legislation containing items that could have an impact on U.S. relocation, if it is passed as currently proposed. If the proposed legislation is passed, the expectation is that most provisions within the new law impacting mobility would likely be effective in 2018. We will continue to keep you informed as this matter progresses and more information becomes available.
The impact of the proposed legislation would be that most companies who move U.S. taxpayers could see an increase in taxable wages for those employees, and depending on their relocation policy, an increase in tax gross-up costs.
What Mobility Managers Need to Know About the Potential Impact to Relocation
Following are considerations for relocation managers about the potential impact to relocation programs if the proposed tax reform legislation goes through as currently written.
- Moving expense deduction. Moving expenses (e.g., household good shipments and certain other final moving expenses) would no longer be deductible or excludable. Therefore, no more 50-mile rule, no 39-week test, and no more one-year rule for excludable expenses. These moving expenses would now be taxable and the relocation policy may need to be amended to include tax gross-up on those expenses. If the proposed legislation goes into effect as written, a moving expense has to be incurred prior to December 31, 2017 to be excludable/deductible, regardless of when it is paid. For example, if a household goods shipment is delivered on or before December 31, 2017, the expense for that shipment would be deductible/excludable, even if it is paid in early 2018.
- Mortgage Interest Deduction. Additionally, the proposed legislation changes the mortgage interest deduction. Mortgage interest on the primary residence will be allowed up to a maximum loan amount of $500,000. The mortgage interest deduction for home equity loans and second homes will be eliminated under the proposed legislation.
- Average tax gross-up percentage increase. The average tax gross-up percentage under the new individual income tax rates proposed in the legislation is estimated to be approximately 65%. Therefore, a $10,000 household goods invoice would require an approximate $6,500 tax gross-up, whereas currently, a $10,000 household goods invoice requires no tax gross-up.
- Increased requests for relocation tax comparisons. You may see an increase in employee requests for “with and without relocation tax comparisons” and tax reconciliations based on the increased moving-related income and new child tax credit phase-out limit of $230,000 (formerly $110,000), and the child tax credit being increased to $1,600 per child under the age of 17 (formerly $1,000). Under the proposed legislation, some employees may lose the benefit of these personal credits due to company-related move income.
- Changes to capital gains on home sales. Under the proposed legislation, the rules will change with respect to excluding gain on the sale of one’s primary residence. Under the current law, a person may exclude the gain on sale if they have occupied the home for two out of the past five years prior to the sale. Under the new proposals, the owner may exclude the gain on the sale of their primary residence, but subject to new limitations. Under the new proposals, the person needs to have occupied the residence for five out of eight years prior to the sale, and the exclusion has a cap for individuals with Adjusted Gross Income (AGI) of $500,000 (married filing jointly) or $250,000 (single). Thus, the exclusion may only be claimed once every five years, and may be reduced or eliminated for high income individuals with an AGI over the cap amounts.
- Relocation-related home sale transaction. Good news! The existing home sale transaction is not impacted by the proposed legislation and thus will remain non-taxable, as long as it is in accordance with the Worldwide ERC® 11-step process.
Additional Support for You and Your Employees
We understand the importance of receiving expert advice on relocation tax impacts, as these proposed laws are complex and could apply to any person/employee subject to U.S. tax law who is required to file a U.S. tax return during the year of a move. As a result, Cartus is able to offer you and your employees various tax services through Ineo, LLC, including:
- The Relocation Tax Advisor booklet (also in PDF) explains the current 2017 tax year-end laws and their relocation impacts, as well as the newly proposed 2018 laws
- Pre-move tax consultations
- Employee group move tax meetings
- With and without relocation tax comparisons
- Tax return preparation services
The information above is not intended to be an exhaustive list of the impact of the proposed tax reform bill, but is intended to bring awareness on the proposed changes that could potentially impact relocation costs. We will continue to keep you informed as this matter progresses and more information becomes available.
For more information, please contact your Cartus representative or email us at firstname.lastname@example.org.