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.
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.
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: