The U.S. Tax Reform bill, entitled the Tax Cuts and Jobs Act, went into effect January 1, 2018 having been passed by the U.S. House, Senate and signed into law by the President.
The late-year timing of this legislation leaves those impacted with little time to determine what actions need to be taken.
NEI Global Relocation (NEI) is providing highlights from the final bill as to how it could affect corporate mobility programs, how there might be more resistance for employees to accept moves in high income/property tax states and what relocation policy actions should be considered to address the law. NEI is helping clients develop and re-write tax assistance policies, along with helping communicate these changes and their impact to each client’s relocating employees and mobility administrators accordingly.
Moving Expense Deductions are Gone
Effective 2018 through 2025 – unless Congress chooses to extend it – the new law repeals the taxable exclusion of the following relocation expenses which will now become taxable:
- Household goods moving expenses
- Household goods storage expenses (previously intra-U.S. storage was excludable for the first 30 days and unlimited for an international assignment while at the new job location)
- Final move travel non-meal expenses
Employers will need to decide to provide tax assistance for these expenses or not, but in already consulting with many of our clients, NEI has found the great majority have selected to tax assist these three benefits and not put the added tax burden on the relocating employee. NEI is available to assist with projections related to these potential changes. Knowing projected move volumes for 2018, company stakeholders can then best understand how the additional tax assistance will impact the company’s overall budget and the company’s average move expenditures going forward, as well as be aware of what the potential tax burden could look like to their employee if gross-up is not being provided.
Companies are encouraged to work with NEI to update their relocation policies to reflect any appropriate tax-related changes and NEI further recommends that companies consider updating cost estimates to incorporate these added gross-up costs for relocations projected and/or in process. NEI will be assisting with communications about the tax changes with relocating employees when they receive their Relocation Tax Reports at the end of 2018.
From a payroll software standpoint -- due to the timing of the final bill’s passing/signing December 22nd and it going into effect January 1, 2018 -- it might take time for all parties to fully understand the specifics within the final bill. It is important to address the fact that updates to either internal or external payroll systems could be delayed until after January 1 as the new tax rules are entered into payroll programs.
Other Impacts on Relocation-Related Tax Categories
Changes in additional tax categories that may impact relocating employees’ personal tax filings include:
- Mortgage Interest Deduction: This was reduced to $750,000 from $1,000,000 for mortgages originating on or after December 15, 2017. This is likely to affect people looking for homes in more expensive regions and, while not as popular in recent years, any mobility programs with mortgage subsidy benefits should be reviewed to determine if a change will be made to gross-up the benefit. Also eliminated from deductibility is Home Equity or 2nd Mortgage Interest on the primary residence. If a mobility program has a Guarantee 2nd Mortgage benefit, consideration should be given whether or not to gross-up the benefit.
- State and Local Income, Sales and Property Taxes: The state and local tax deduction remains in place for those who itemize their taxes, but there is a $10,000 cap in 2018 through 2025. Those in higher tax states could experience a considerable decrease in the ability to specifically deduct these items.
- Tax Rates and Income Thresholds: The bill’s 2018 through 2025’s seven federal tax brackets will now have the following rates:
Unmarried Individual Taxpayers:
Married Filing Jointly Taxpayers:
- Standard Deduction: In 2018, this has essentially been doubled and will eliminate many from choosing to itemize deductions. For single filers, the standard deduction has increased from $6,350 to $12,000; for married couples filing jointly, it has increased from $12,700 to $24,000.
- Individual Alternative Minimum Tax (AMT): The AMT, a parallel tax system that ensures people who receive many tax breaks still pay some federal income taxes, remains in place, but fewer people will have to worry about calculating their tax liability under the AMT moving forward due to increased thresholds.
- Supplemental Withholding: While not specifically addressed in the law signed by the President and separately governed, the supplemental wage withholding rate, applicable to nonregular “supplemental” wages paid by an employer (such as bonuses and commissions) is anticipated to change in 2018. The supplemental wage withholding rate currently at 25 percent for supplemental wages less than or equal to $1 million, using the flat withholding method, is expected to be 28 percent based on this. (The rate of 25 percent has been in effect since 2007.) Supplemental wage payments over $1 million currently withheld at the highest tax rate of 39.6 percent would also be anticipated to be adjusted in 2018 to the new highest tax rate of 37 percent.
- Home Sale Capital Gains: This element did not change in the final tax bill signed into law as had been previously proposed in earlier versions. It remains that homeowners who sell their house for a gain will still be able to exclude up to $500,000 (or $250,000 for single filers) from capital gains in 2018, so long as they are selling their primary home and have lived there for two of the past five years.
Reminders: Tax payers will not need to worry about these changes when they soon work on their 2017 tax returns as the new law will first be applied to 2018 taxes. Also, U.S. citizens and residents will continue to be subject to individual income tax on their worldwide income under the bill.
As noted above many of these changes are supposed to terminate in 2025 when the tax code will revert to the old rules.
NEI has already been reaching out to clients and others in the industry to address the immediate needs of their mobility programs, assisting in determining if the moving expenses will be grossed up and checking with their payroll teams to ensure their systems are ready for the updated data to be passed for 2018. The full impact of the tax reform act to a client’s relocation program and policies needs to be discussed and revisions completed quickly to avoid uncertainty to those in process with moves or those looking to accept a relocation program. NEI will work closely with our clients to effect the necessary changes to their programs and processes.
If you have any questions or would like further information, please feel reach out to your NEI Client Relations Manager, NEI Operations Manager, or NEI Client Development representative at any time.
The above information is for general information only and is not presented as tax advice. Please consult with your tax advisor and internal stakeholders before making decisions and taking any action.