The last few months have brought much trepidation relating to how the US "fiscal cliff" will impact many people; however, most concerning in our industry has been the pending impact to relocating employees, payroll departments and Mobility programs in general.
On January 1st, 2013 with the passage of the American Taxpayer Relief Act of 2012 (Act) in Congress and followed by the President's signing of the Bill on January 2nd, some clarity was provided as it relates to payroll and those items impacting Mobility.
As your partner in Mobility solutions, NEI Global is providing you this overview of the changes and how they may impact your organization.
Individual Income Tax Rates
With the Bush-era tax cuts being made permanent for 2013 and beyond, individual taxpayers with taxable income under $400,000 ($450,000 for married taxpayers) will not see their marginal tax rates increase. For these employees, this means the companies will not incur any additional costs associated with any gross-up benefit provided. Employees whose taxable income will exceed the $400,000/$450,000 threshold will be subject to the increased 39.6% marginal tax bracket over the prior 35%. This may cause their gross-up benefit to become more costly to the company if calculated based on the employee's expected tax bracket.
All employees may still feel the effects of the "fiscal cliff" in their first paycheck of 2013. The Act did not include any provisions to extend the 2012 payroll tax holiday that had reduced the Social Security tax from 6.2% to 4.2%, up to the Social Security earned income wage base of $113,700 for 2013. For gross-up calculations that factor in the Social Security for employees not meeting this wage base maximum, this will have the effect of increasing gross-up costs, as well.
Not included in the Act is any adjustment to the Patient Protection and Affordable Care Act of 2010 that will be effective in 2013. Taxpayers generally earning in excess of $250,000 (married) and $200,000 (unmarried) will be subject to an additional 0.9% Medicare Hospital Insurance tax on wages. In addition to this new deduction in the employee's paycheck, the relocation impact to the company may be increased costs if an adjustment is included in the gross-up methodology to compensate any employee that triggers this additional tax.
Also not included in the Act is any provision on the "Pease" limitation on itemized deductions. For 2013, these provisions are reinstated for taxpayers with Adjusted Gross Income (AGI) in excess of $300,000 (married) and $250,000 (unmarried). This limitation would have reduced some of the employee's otherwise allowable deductions by 3% of the amount up to certain thresholds. Again, the relocation impact will be increased costs to the company if an adjustment is included in the gross-up methodology to compensate the employee for this additional tax.
Permanent AMT (Alternative Minimum Tax) Relief
Varying numbers of taxpayers, estimated from 28 million to 100 million, would have been impacted for 2012 and subsequent years had the Act not put in place a "patch" for 2012. This will avoid additional taxes for a very large number of relocating employees, and potentially their employers, if any consideration is given to AMT in their gross-up calculations.
For those that are impacted by AMT, the Act updated the exemptions to the following amounts for 2012 and indexes the future year amounts. In addition, the Act allows nonrefundable personal credits to be taken against the AMT starting in 2012.
Without the Act
"New" 2012 Exemptions
Under the Act
"New" 2013 Projected Exemptions Under the Act
Married Filing Jointly
Married Filing Separately
Personal Exemption Phase Out
While many relocating employees have generally reached the personal exemption phase out, the Act exemptions included were increased slightly higher than in the past years. There may be a very slight potential of a cost savings, if your gross-up methodology considers any lost exemption phase out.
Child Tax Credit
With the Act, the Child Tax Credit of $1,000 has been permanently extended as it was previously scheduled to revert to $500 after 2012. The $1,000 amount has been in place since 2003. There were not any provisions for inflation for future years. This will have a cost neutral impact to any applicable gross-up calculation, provided the child tax credit is considered within the gross-up calculation.
Exclusion of Cancellation of Indebtedness on Principal Residence
The ACT extends the exclusion of any cancellation of mortgage income indebtedness on a principal residence of up to $2 million for one more year, through 2013. For many relocating transferees faced with short sales or lenders forgiving debt on their mortgages, this will allow them to avoid any further financial penalties from having this included in their taxable income. While many employers previously did not cover any type of tax assistance on these penalties prior to the Mortgage Debt Relief Act of 2007 that was scheduled to expire at the end of 2012, it was also not as commonly seen as it is today. Therefore, this extension should avoid any requests from employees requesting tax assistance in this area for 2013.
While the Act did not address all aspects of the "fiscal cliff", it brought clarity (at least temporarily until further review by Congress) to the immediate issues for tax rates, AMT and a few other items that can impact relocation. While little change is anticipated to the tax rates included in this round of the Act, NEI will continue to monitor the on-going discussions as they relate to relocation and will provide updates if there is any further potential impact to relocation programs.
If you would like to discuss how your specific company's gross-up methodology will be impacted with these latest updates or to have a review of your current gross-up methodology, please do not hesitate to contact Janine Jarecki, Controller 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.