The various changes to U.S. tax provisions in the past year may result in confusion among your employees who have relocated. Employees may be surprised at the impact of these tax changes and initially attribute the increased tax burden to be related to their relocation—which may not be the case.
The following American Taxpayer Relief Act of 2012 (“Act”) and The Patient Protection and Affordable Care Act (“Health Care Reform”) tax changes should be reviewed before assuming that a relocation is responsible for any increases:
Federal Tax Bracket Added
While the lower Bush-era income tax rates for all became permanent for 2013 and beyond, taxpayers with taxable income above $406,750 ($457,600 for married taxpayers, $432,200 for heads of households) will be taxed at a new 39.6 percent rate. The Act also uses the same threshold to apply a higher capital gains and dividend rate of 20 percent—up from 15 percent previously.
Social Security Tax Back in Effect
The temporary rate reduction for Social Security taxes was not extended as part of the Act. The temporary rate reduction for 2011 and 2012 reduced the employee’s portion of Social Security taxes from 6.2% to 4.2%. For wages paid after January 1, 2013, the Social Security 6.2% rate, is back into effect, and is being withheld from employees’ wages/relocation payments.
Additional Medicare Tax for Higher Income Individuals
Based on the Health Care Reform, a 0.9 percent increase in Medicare taxes for higher-income individuals has also gone into effect for any wages paid after January 1, 2013 that exceeds the designated guidelines. The following chart indicates when the individual becomes liable for the additional Medicare tax based on the individual’s tax filing status.
|Married Filing Jointly
|| $ 250,000
|Married Filing Separately
|| $ 125,000
|| $ 200,000
|Head of Household (with qualifying person)
|| $ 200,000
|Qualifying Widow(er) with Dependent Child
|| $ 200,000
It is important to note that most relocation benefits are included when calculating the threshold amount. These benefits include items such as Lump Sums, Miscellaneous Expense Allowances, Home Finding expenses, Loss on Sale, and/or Temporary Living expenses paid on behalf of the employee and exclude qualifying Final Move, Household Goods Moving and Home Sale Program expenses. Also included, would be any gross-up amounts to offset the tax burden to the employee.
Other items that may be impacting an employee who believes his relocation benefits changed his tax situation this year may be related to other tax changes. In considering the outlined thresholds, employees should determine if these other items such as third-party sick pay, group-term life insurance coverage in excess of $50,000 and numerous other special circumstances related to the Railroad Retirement Act (RRTA), Self-Employment Contributions Act (SECA) and treatments related to employees involved with mergers and acquisitions placed them in the new higher tax bracket.
It is also worth noting that most relocation gross-up methodologies are designed to provide the applicable benefit based on income and tax brackets only for the employees’ company income and do not include other sources of income such as investment income or spouse wages.
Delays to Submit and Process Tax Returns
Based on lasting effects of the recent government shutdown, the Internal Revenue Service has announced a possible two week delay in accepting and processing tax returns—starting no earlier than January 28th 2014 and no later than February 4th, 2014.
The government closure came during the peak period for preparing IRS systems for the 2014 filing season and during the closure, more than 400,000 pieces of correspondence were received. With the new tax law changes and closure backlog, additional training, programming and testing demands on IRS systems are necessary in order to provide adequate fraud and identity theft detection and prevention. Electronic filing is highly encouraged this year for the most expeditious response.
Many employers with relocation programs may experience increased gross-up appeals due to these various changes. If your employees voice concerns about their taxes this year, keep in mind that it may not have been your relocation benefits impacting their tax concerns.
For your employees with authorized relocation benefits subject to gross-up, you should consider incorporating the impact of each tax change related to tax brackets and income levels into your company’s tax assistance benefits.
In addition to providing this communication to our clients, NEI has shared this information with relocating employees to help break down and identify some of the overall changes that have impacted taxpayers this year.
If you would like to discuss what might be involved in approving a relocation tax gross-up appeal or any other matters related to your company’s tax assistance benefit, please do not hesitate to contact NEI’s Expense Administration Controller, Janine Jarecki at 800.533.7353.
This information is being provided based on available resources at the time of distribution. The information is general in nature and is being presented as an overview. It should not be viewed as tax, legal or other advice as to a specific program or consequences arising from a particular situation.