Any discussion of relocation benefits and their tax treatment has three parts: the good, the bad, and the part that needs more explanation.
The good: relocation benefits, period! They’re a powerful recruiting tool for businesses and a valuable benefit for employees who want to relocate for work.
The bad: employer-paid relocation expenses are taxable to employees—and that usually costs employers more, too. It wasn’t always the case, and may not always be, but for now, relocation benefits are considered income.
The part that needs more explanation: while there aren’t exactly loopholes, there is a valid workaround, plus some exceptions. Here’s a quick primer.
Yes, Paid Relocation Expenses Are Taxable to Employees
Back in the good ol’ days, before the Tax Cuts and Jobs Act of 2017, employer-paid relocation benefits were not taxable to employees. But in order to offset other elements of the law, this provision was reversed.
It doesn’t matter which benefits are covered (moving costs, transportation, etc.) or how the employer pays for them (cash disbursements, reimbursements, etc.). Benefits are treated as taxable wages and are subject to federal income tax and FICA.
Of course, the specific tax impact on each employee varies, depending on their relocation benefit, income/tax bracket, and place of residence. But one thing is universal: paid relocation expenses are included in employees’ W-2s.
The law changed things for employers, too. Before 2018, paid relocation benefits were considered a tax-deductible operating expense. Now, they’re a compensation expense. While the net impact of this change is minor, the workaround is anything but.
The Workaround: Employer-paid Relocation Tax Gross-ups
Employers realized that, if employees had to pay taxes on relocation benefits, fewer would relocate (or, at least, relocate happily), and that could cripple their talent management plans. So, most employers chose to compensate employees for the cost of those taxes—i.e., pay relocation tax gross-ups.
Handling relocation tax gross-ups isn’t a simple process. There are several calculation methods to choose from and lots of moving parts. For this reason, many employers outsource this function to their relocation provider’s tax team.
Relocation tax gross-ups aren’t quite a “loophole,” but a legitimate business solution to an otherwise sticky problem.
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Three Exceptions to Relocation-related Tax Law
Every rule has exceptions. In this case, here are three instances where relocation expenses are not considered employee income and/or are deductible.
Exception #1: Military Moves
Active-duty members of the U.S. Armed Forces can exclude moving expense reimbursements from their income if they move as a result of a military order, as specified by the IRS.
Exception #2: Some State-level Tax Laws
Most states automatically “conform” their income tax laws to mirror federal tax laws. However, in a handful of states, employer-paid relocation expenses can still be excluded from personal income—or, if reimbursement isn’t provided, deducted from state income taxes.
Obviously, this is something that relocated employees should discuss with their tax accountants
Exception #3: Some Forms of Home Sale Assistance
Many relocation plans cover expenses related to the sale of a home—i.e., realtor fees and closing costs. Under the most-common arrangement, employees handle their home sale, but their employers pay the costs, which are then considered taxable income.
However, there are two scenarios that are treated differently and offer tax benefits to employers and employees:
- A Buyer Value Option (BVO) – The employee lists the property, but once a buyer is confirmed, the relocation company buys the home at the offer price and completes the sale with the buyer.
- A Guaranteed Buyout (GBO) – The employee lists the property, but if it’s not sold within a certain time period, the relocation company buys it for a pre-determined price and then sells it independently.
In these situations, home sale costs are considered employer business expenses and therefore are not considered income to employees, as outlined in IRS Revenue Ruling (2005-74).
The Kicker: It All Could Change in 2026
Now that you have a handle on relocation-related tax law, brace yourself: The Tax Cuts and Jobs Act is designed to sunset—aka, end—on January 1, 2026. Unless legislation is passed to extend the law, everything will then go back to how it was before.
In that event, the way relocation expenses are taxed (or not) will be more advantageous to employers and employees—but of course, that will be offset by other tax changes.
And so, we’re back to where we started—with a fresh discussion of the good, the bad, and the part that will need more explanation.
Reminder for employers and employees: for specific information about your situation, always consult your relocation provider and your accountant.
