Tax Talk - The Impact of US Tax Reform on Your Mobility Programs
Most people in the mobility industry have been closely watching the tax changes currently being proposed in the US to be effective from Jan 1, 2018. Whilst your tax advisors can give you the full technical rundown of the proposed changes, now that the fireworks and bubbles of New Years Eve have faded away it’s time to start giving some thought to how these changes could potentially impact your program and your mobile employees.
For the mobility industry, the biggest change in the proposal is the removal of the deduction for moving expenses for a qualifying relocation. Compared to most other countries, the US already had quite a restricted deduction – basically only allowing travel costs and shipping costs as tax exempt benefits. From 2018, the proposal is that this deduction is completely removed, and all relocation benefits provided to the employee and their family become subject to taxes. In many cases, this will significantly increase the overall expense of relocating employees.
In addition to the removal of the deduction for moving expenses, there is a proposed change to tax rates and other deductions, meaning for some income levels and family situations the overall effective tax rate may go up or down. Although these changes may not make a significant overall difference across your population, they may mean you need to take a look at your payroll processes and consider any impact on your tax equalization program, such as an adhoc revision to hypothetical tax withholdings.
Time to look at your policies?
For years, some companies have been structuring their policies in line with the tax legislation – for example, allowing employees to claim for reimbursement for travel and shipping costs and providing a cash allowance for the employee to cover any remaining expenses. This avoided the need for companies to impute and gross up on non-cash benefits provided to employees.
Policies structured this way may no longer make sense as, unless the company provides purely a cash allowance, then there will be some form of payroll processing and gross up needed for any benefits provided. Rather than move to a purely lump sum policy, which has its advantages but also its disadvantages from an employee experience perspective, companies may want to move towards a more structured package and invest the time working with their providers to flesh out a solid payroll process.
Revisiting your budgeting
Chances are before you moved your employee or sent that employee on assignment you undertook a cost estimate exercise, getting approval from the business on the total budget for the move and allowing your finance and tax team to book accruals for the costs to come in.
For moves that are just starting or assignments in progress with a future repatriation to manage, these estimates will now be understated, potentially substantially so. If we take a simple example of a family of 4 moving from London to the Bay Area, and estimate flights and shipping of goods to total $30,000, grossed up tax on these two items at an approximate 40% tax rate can add another $20,000 onto the total cost of the move – currently unbudgeted for and unavoidable.
You may want to look at your open moves and consider whether you need to go back to the business or to your finance teams to at the very least ensure they are aware of this additional cost.
‘Gross’ just became more painful
Another consideration is for companies that offer their relocation packages on a ‘gross’ basis – meaning that if the employee benefits from any assistance that doesn’t qualify for tax exemption then they personally are responsible for taxes due.
Considering our above example of the family of 4, shipping and travel valued at $30,000 for a 40% taxpayer would trigger a personal liability of $12,000 – something that employees may not be willing to take a hit on for such non-elective support as physically getting to the new location and moving their belongings.
This approach is now further problematic for international policies, where moves to places like France, Singapore, the UK, etc will see the majority of relocation benefits being provided tax free whilst moves to the US are disadvantaged with a high tax charge.
To W-2c or not to W-2c?
When completing their year end payroll processes for 2017, most companies will apply some form of November or early December cutoff in order to meet their December payroll deadlines. This meant, for example, including income from 1 December 2016 to 30 November 2017 in 2017 W-2s.
However, for 2017 companies may want to consider including all payments made up to 31 December 2017 in their 2017 reporting, protecting the exemption for shipping and travel costs to this date. This may mean doing W-2cs in January in order to fully capture all payments, and you should consult with your tax adviser prior to making any changes to fully understand any risks.
On the plus side, the removal of the exemption does mean that the position on what is taxable (basically everything) and what is exempt (basically nothing) is clear for both employees and employers! There will no longer be an incentive for employees to spend any relocation budgets on certain items just to save on tax, and payroll teams will find it easier to process their gross ups.
To chat through what these changes mean for you and your program, get in touch with us at email@example.com.