Relocation Tax Fundamentals
The Domestic Relocation Program provides relocation assistance for employees and their families. Some services and reimbursements are deductible, excludable, taxable or tax-deductible. When the company reimburses for an expense that the IRS does not consider deductible, the company’s reimbursement becomes a tax burden to the employee.
Relocation Eligibility
Employees may deduct, as an adjustment to gross income, the expense of moving themselves and their household members from one location to another, if the move is related to starting work in a new location and the amount is reasonable. The IRS limits deductions in some states.
Duplicate house payments, are also deductible as mortgage interest when treated as your primary residence and second home.
Real Estate Taxes
The employee must account for their deductible moving expenses by giving the employer receipts or documentation as evidence of moving expenses. Employees should submit a statement of expense and it is recommended that they keep a diary or similar record to include receipts, canceled checks, and bills.
Moving Expenses-Deductible from Income
Whether the employer reimburses or not for any of the following expenses, they are deductible from income net of any reimbursement.
- Household Goods and personal effects, includes cost of van, packing, crating, insurance, disconnecting & reconnecting utilities, and all appliances, satellite dishes, antennas, cable, etc.
- Storage of household goods and personal items within a period of 30 consecutive days.
- Shipping a car, motorcycle, boat, and pets.
- Rental vans plus gas, oil, tolls, and parking fees.
- Tips for the movers, includes cost of food items, donuts, coffee, pizza and sodas, etc.
- Cost of any packing supplies you purchase for personal packing
- Moving a college student
- Transportation from Temporary living to your permanent home
- Rental car for final move up to four days – 3 days in old location – 1 day in new location.
- Mileage @ xx cents per mile or gas and/or oil.
Moving Expense – Excludable from Income
Excludable moving expense paid directly on the employee’s behalf by the employer to a vendor or supplier, such as van line, are not included in any of the amounts that are reported on the W-2, nor should they be included on Form 3903. This expense may be considered a business expense for the employer.
Reimbursements (The W-2 Box 1 and Box 12)
Deductible moving expense reimbursements paid directly to the employee will be reported in Box 12 of their W-2 and will be preceded by the code letter “P.” Under no circumstances should they be included in Wages that are shown in Box 1 of the W-2. The employer must withhold federal income tax, social security tax, Medicare Tax, and state tax from reimbursements. Most employers increase reimbursement to make up for the deductions for taxes – called Gross-Up. This enables the employee to be fully reimbursed for nondeductible moving expenses or provides some tax relief, depending on the company’s tax policy, for the monies paid to employees or on their behalf.
Points – when the employee is reimbursed for points on a new home mortgage, this will also be included with your taxable wages. The employee should include the amount paid to them on Schedule A, Itemized Deductions, as interest paid on their mortgage.
Lump Sum Reimbursement – Should they receive a lump sum payment for moving expenses, they are entitled to deduct the actual costs for household goods move, travel, and lodging as part of their final move, on IRS Form 3903, since the entire amount of the lump sum payment is reported as wages in Box 1 of your W-2.
Websites
www.sisterstates.com
www.irs.gov.com (forms)
www.relotax.com
IRS Publications
- #521 – Moving Expenses
- #552 – Record Keeping Requirements
- #523 – Selling Your Home
- #463 – Travel and Car Expenses
- #527 – Residential Rental Property
- #530 – Tax Information for Homeowners
- #936 – Home Mortgage Interest Deduction (also see #932)
As with all tax related information, please consult and rely on your own counsel for final interpretation of regulations.
