On November 2, 2017, the U.S. House of Representatives Ways and Means Committee released new tax reform legislation entitled the “Tax Cuts and Jobs Act.” Although currently in review and not yet passed into law, there are portions of the proposed tax law that would bring about a significant shock to the global mobility industry. Because of the impact that this bill as it stands would have on our industry, it is imperative to understand what the current proposals entail and what the consequences would be as we move forward into 2018.
Elimination of the Household Goods Moving Expense and Final Move Non-Meal Expense Deduction
The household goods move for the employee is currently seen as excludable or non-taxable. Under the proposed bill, all of these costs will become taxable in 2018 and corporations will need to determine if they are willing to cover the cost of the taxes (or gross-up) on behalf of their transferring employees. As the household goods move is typically one of the most expensive relocation benefits offered (second only to the sale of the home), the financial ramifications for both the employer and the employee are considerable. For example, if a household goods shipment costs $20,000.00 and the estimated gross-up to cover the taxes on the shipment would be $13,000.00, the employer would face an additional $13,000.00 in relocation fees, and the employee would see $33,000.00 of additional taxable income in their W-2—just for the household goods shipment alone.
Currently, final move expenses, including airfare or mileage (up to the current IRS mileage reimbursement rate for moving expenses) and lodging are excludable. Meals are typically the only portion of the final move trip that are taxable. The proposed legislation would make all of these final move expenses taxable.
Reduction in Mortgage Interest Deduction
The House proposes a reduced limit on the value of a home loan to qualify for a mortgage interest deduction. Currently, the limit is set at $1,000,000.00. Under the proposed law, that decreases to $500,000.00. There is a proposed cap on the property taxes that can be deducted as well.
In the mobility industry, million dollar homes are not typically the norm, but they are sometimes part of corporate relocation programs. However, in many parts of the U.S. $500.000.00 homes are quite common. This proposed legislative change would mean that more transferring employees would lose some of their home tax deductions. This effectively makes owning these homes more costly and it could affect the employee’s purchase behavior at the destination and even his or her willingness to relocate, particularly to higher cost cities.
From a home purchase perspective, loan origination fees and mortgage points will become fully taxable as well should this bill be passed into law.
Elimination of State and Local Tax Deduction
Currently, employees who live in a state with a state income tax can deduct these payments for Federal tax purposes. The House proposal eliminates that deduction, meaning that state and Federal income taxes would both be due in full. This increased tax burden makes moves to states with higher state taxes less attractive for potential transferees. The chilling affect will be even greater for employees who currently live in a state with no income tax and the destination state has a state income tax.
Increase to the Child Tax Credit
The proposed legislation provides for an increase in the child tax credit, and the phase-out for the tax credit (the maximum income in order to take the credit) will be higher. While this is good news for parents, the proposed tax law could affect transferees in an unexpected way. With relocation benefits added to their W2, transferring employees become more likely to hit those phase-out limits than they would have been with their salary alone.
Companies will need to consider what assistance, if any, they will offer to compensate employees. This assistance, of course, will increase gross-up costs and overall program costs. On the other hand, without assistance, employees will be less satisfied and possibly less willing to consider a relocation.
The Senate Take on Tax Reform
Senate Republicans introduced their own tax reform bill on November 10. The Senate legislation differs in some significant ways from the House legislation. Here are a few differences of interest to those involved in employee relocation:
State and local taxes
The Senate bill repeals the deduction for state and local taxes, with no exception for property taxes. The House bill allows deductions up to $10,000 for property taxes.
Home mortgage interest deduction
The Senate would continue to allow the deduction for newly purchased homes up to $1 million; the house would the threshold to $500,000.
Other tax credits and deductions
The Senate bill keeps tax credits and deductions for adoption, medical expense, teacher expenses, and student loan interest (but not moving expenses).
TRC Global Mobility, in conjunction with the Worldwide Employee Relocation Council® (ERC®), will be monitoring the discussions and decision-making surrounding this tax legislation very closely. We will keep you updated on the status of the legislation and the impact it has on our industry. We will also be working with our clients to review their programs and how the proposals could affect their employee relocation program and transferring employees.