The new US tax law (Tax Cuts and Jobs Act) slams head on expatriate relocation programs
There is a lot for the payroll industry to contend within the recently-passed US new tax law. And as usual, the changes all happened at year end. The reprogramming for withholding changes have been rushed and are frantically being implemented. Advice is being given for employees to check their own withholdings to make sure it is right. What a mess!
US taxpayers have been trying to wrap their heads around the impact of the Tax Cuts and Jobs Act (“TCJA”) including the effect of modifications to federal tax rates, state and local deductions being limited, and the increase to the standard deduction among others.
TCJA Changes Taxability of Relocation Costs
For corporate expatriates and their employers, there is a very material wrinkle. Expatriates are an expensive group of employees. Beyond their salaries, expatriates often receive additional benefits and allowances while on temporary assignments including, for example, housing subsidies to ensure that the employee is not out of pocket for excessive rent, assistance with the higher cost of living in certain locations, and the “grossing up” of tax costs on the payment of these kinds of expenses that are in excess of their regular compensation.
For as far back as I can remember (and I have been dealing with expatriates since they were moving around on wooden boats), expenses for relocation have been mostly deductible and the reimbursement by employers for those move costs have been mostly excludable. Similarly, in the costs involved with relocation is tax efficient in most other countries around the world. TCJA ends all of this in the US as of January 1, 2018. No more deductions and no more excludable reimbursements. This adds up to new and potentially massive “up front” and “back end” costs to an assignment. Here is a quick example.
Illustration of Increased Tax Cost of Relocation under TCJA
Let’s assume the expense for packing, shipping and unloading a container as part of a US outbound relocation is $20,000. The employer typically pays for the expense or reimburses the employee who incurred it. Under the old law this payment/reimbursement was excludable. So, under pre-TCJA the total HHG cost to the employer was $20,000 net.
Under TCJA the reimbursement is now taxable. If we assume the applicable 2018 US federal tax bracket in this case to be 35% and we assume a state tax rate to be 7% then the total cost of the HHG reimbursement is now $34,482 ($20,000 plus a tax grossup at 42%). Because of the tax on tax aspect of the grossup, there represents an increase of 72% to the HHG cost!
HHG is just one previously tax efficient relocation cost. There are many others. In fact, the total cost of a single relocation could easily exceed $50,000 before the new tax effect. Under TCJA the net employer cost could increase from $50,000 to more than $86,000 at the rates illustrated above. And remember, the additional tax hit comes at both ends of the assignment!!
Other Side Effects of TCJA
In sum, this change could affect the overall total of US outbound and inbound assignment transfers. As employers look for ways to keep their expats on the road, they may seek to modify policies and reduce benefits or share certain assignment costs with the expatriates so that the overall assignment cost to the employer is reduced. If the policies are perceived as less generous, they may be rejected by potential assignees. The law change will likely also have an impact on the relocation industry – potentially less international assignments (and domestic moves too!) as the added tax costs will certainly reduce the corporate appetite for relocations that will now be even more expensive than before.
So for payroll professionals out there, GOOD NEWS! TCJA simplifies things for you as relates to relocation. No more W2 Box 12 code P reporting! But for your employer, this means new costs and a rethinking about how to accomplish international business objectives with a globally mobile workforce that may be shrinking as a direct effect of TCJA.
And finally, many thanks to my friend Matthew Pascual from Weichert Mobility Tax Services for input and edits.
Read more about the Tax Cuts and Job Act here
Dave Leboff is the President, US Operations for Immedis and based in New York. Get in touch if you have questions about expatriate payroll for your own organization by emailing email@example.com
More tips from Dave Leboff: