Relocation & Taxes: 5 Facts Every Employee Should Know in 2023

Corporate relocation benefits can be complicated, and one notoriously-complex area is the tax implications for employees.

One reason for this is that U.S. tax law was radically changed five years ago, with the passage of the Tax Cuts and Jobs Act of 2017. Unfortunately, most of these changes don’t favor employees (or their employers, but that’s another story).

However, knowledge is power. When you understand how relocation benefits are treated by the IRS, you can plan accordingly—which is why we’re sharing these key facts here. If you relocated recently or if it’s in your future, you’ll want to discuss these with your employer and tax advisor.  


1: Relocation Benefits Are Considered Taxable Income      

In the good old days, relocation benefits—or, in IRS speak—“qualified moving expense reimbursements”—were not treated as income, so employees didn’t pay taxes on them. But that all changed on January 1, 2018, when the Tax Cuts and Jobs Act took effect. 

Now, all relocation benefits that an employee receives are taxable. It doesn’t matter if the funds are paid upfront in a lump sum, as after-the-fact reimbursements, or even if the employer pays vendors directly. 

The sole exception: active service members who move as a result of a military order. They don’t need to claim qualified reimbursements as income; in fact, they can deduct unreimbursed moving expenses. But unless you fall into this group, it’s not an option for you right now. 


2. Many Employers Cover Those Taxes, Via Tax Gross-ups

Now, here’s some good news: most employers will provide employees with additional funds to cover the cost of relocation-related taxes. These funds are called tax gross-ups.

Employers do it because they know that the goal of offering relocation benefits is to persuade new hires to move and existing employees to accept job transfers. They understand that sticking employees with a big tax bill after the fact undercuts that goodwill.

That said, here are two questions to always ask employers about tax gross-ups:

  • Before accepting a job offer with a relocation package, ask if tax gross-ups are included. While most employers provide them, it’s not a given. But it can be negotiated—if you ask upfront.
  • Tax gross-ups can be calculated and handled in different ways. (Many employers have their relocation companies handle these on their behalf.) Ask your employer what to expect, so there’s no confusion at tax time.  


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3. A Few States Allow Deductions for Moving Expenses 

Most states link their tax codes to federal tax law, but a few states allow residents to take deductions on job-related moving expenses that employees have paid out-of-pocket. 

While the specifics vary by state, these deductions generally include unreimbursed costs for moving household goods, as travel and mileage. To the best of our knowledge, this is the case in:
•    Arkansas
•    California
•    Hawaii
•    Massachusetts
•    New Jersey
•    New York
Obviously, this is something to discuss with your accountant regarding your state taxes. 


4.  Some Home-Buying Expenses Remain Tax Deductible

More good news: if your relocation includes a home purchase, some unreimbursed closing costs are tax deductible, including:  

•    State and local real-estate taxes, up to $10,000
•    Mortgage interest on loans up to $750,000, including some or all mortgage points  

Now, many relocation policies do cover some or all closing costs, which may include mortgage points. So, once again: be sure to review this with your advisor when preparing your taxes.


5. More Tax Rule Changes Ahead!    

Many provisions of the Tax Cuts and Jobs Act are scheduled to sunset on December 31, 2025, including the treatment of employer-paid relocation expenses. If no new laws are enacted between now and then, IRS rules would revert to pre-2018 status—which means paid relocation expenses would no longer be taxable to employees.  

However, at this point, it’s unclear what will happen. Last fall, House Republicans introduced the TCJA Permanency Act, which as the name implies, would extend the life of the Tax Cuts and Jobs Act. Although the bill is controversial, it was reintroduced in February, 2023. We don’t really know how things will unfold. 

Despite everything, one thing is clear: if you wish to relocate for a job opportunity, relocation benefits can be a gamechanger—and when an employer offers them to you, that’s an excellent sign that this employer values its people. 

At that point, it’s up to you to find out what those benefits include and how to make the most of them, tax implications and all. 

Human Resources Today