Moving Expense Reimbursement
Moving expense reimbursement, within the realm of personal finance and tax law, refers to payments an employer provides to an employee for costs incurred when relocating for work-related reasons. These reimbursements historically held significant tax implications, though recent legislative changes have altered their treatment for most taxpayers. Understanding moving expense reimbursement is crucial for both individuals planning a relocation and businesses structuring compensation packages.
History and Origin
For decades, the Internal Revenue Code allowed individuals to deduct certain job-related moving expenses from their gross income and for employer-provided moving expense reimbursements to be excludable from an employee's taxable income. This provision aimed to alleviate the financial burden on individuals who needed to relocate for employment, whether for a new job or a transfer. Before the 2018 tax year, to qualify for these tax benefits, a move generally had to meet specific distance and time tests: the new job location had to be at least 50 miles farther from the former home than the old job was from the former home, and the employee had to work full-time for a certain period in the new location.
A significant shift occurred with the enactment of the Tax Cuts and Jobs Act (TCJA) of 2017. This comprehensive tax reform suspended the deduction for moving expenses for most taxpayers for tax years beginning after December 31, 2017, and before January 1, 2026. Consequently, most employer reimbursements for moving expenses during this period are now considered taxable income to the employee. The Internal Revenue Service (IRS) issued guidance, specifically Notice 2018-75, to clarify how these changes apply, particularly for reimbursements made in 2018 for moves that occurred in 20178. The suspension has led to considerable changes in how employers structure relocation packages and how individuals account for moving expenses.
Key Takeaways
- Moving expense reimbursement is money paid by an employer to an employee to cover relocation costs for work-related moves.
- The Tax Cuts and Jobs Act (TCJA) of 2017 suspended the federal tax deduction for moving expenses for most taxpayers from 2018 through 2025.
- During this suspension, most employer-provided moving expense reimbursements are treated as taxable income to the employee.
- An exception exists for active-duty members of the U.S. Armed Forces moving due to a military order and permanent change of station, who can still deduct qualified moving expenses and receive tax-free reimbursements.
- The IRS Publication 521 provides comprehensive guidance on what constitutes qualified moving expenses for eligible individuals7.
Interpreting Moving Expense Reimbursement
The interpretation of moving expense reimbursement largely hinges on its taxability. For most individuals between 2018 and 2025, any moving expense reimbursement received from an employer is viewed as additional compensation and is therefore subject to federal taxes, including income tax and employment taxes6. This means the employer will typically include the reimbursed amount in the employee's wages reported on Form W-2.
Conversely, for active-duty military members, qualified moving expense reimbursements remain excludable from their gross income. The IRS defines eligible moving expenses as "reasonable costs" for moving oneself and belongings, including transportation of household goods and personal effects, and travel expenses (excluding meals) to the new home. Such reimbursements for military personnel are not subject to income tax withholding or employment taxes. Understanding these distinctions is critical for proper tax planning and compliance.
Hypothetical Example
Suppose Jane, a software engineer, accepts a new job offer in a different state in June 2024. Her new employer offers to reimburse her $5,000 for her moving expenses, which include hiring a moving company and transportation costs for herself. Jane is not a member of the U.S. Armed Forces.
When Jane receives the $5,000 moving expense reimbursement, this amount will be added to her regular wages. Her employer will include this $5,000 in her total taxable income reported on her Form W-2 for the 2024 tax year. As a result, Jane will pay federal income tax and other payroll taxes on this $5,000, just as she would on her regular salary. She cannot claim this $5,000 as a deduction on her tax return because the deduction for moving expenses is suspended for non-military taxpayers until 2026.
Practical Applications
Moving expense reimbursement is a key component of corporate relocation policies, particularly for companies seeking to attract talent to new geographic locations. Despite the changes in tax treatment, employers continue to offer these reimbursements as part of comprehensive fringe benefits to facilitate employee mobility and reduce the financial strain of relocation.
Recent surveys indicate that companies continue to invest in employee relocation, with many reporting increases in relocation volume and budgets. While factors like housing market volatility and dual-income households have led to employees declining relocation offers, employers are responding with improved financial support and more flexible, customizable relocation benefits5. The availability of moving expense reimbursement, even if taxable, remains a significant incentive for employees considering a move. Businesses integrate these reimbursements into their talent acquisition and retention strategies, understanding that facilitating a smooth transition can enhance employee satisfaction and productivity in their new roles.
Limitations and Criticisms
The primary limitation of moving expense reimbursement for most individuals from 2018 through 2025 is its taxability. Prior to the TCJA, qualified moving expense reimbursements were non-taxable, offering a direct financial benefit to the employee. Now, for non-military taxpayers, the reimbursed amounts increase their adjusted gross income and are subject to taxation. This can effectively reduce the net benefit of the reimbursement for the employee, making relocation potentially more costly out-of-pocket than before the tax law changes.
This change has drawn criticism from some who argue it places an undue burden on employees who must relocate for work, particularly in industries or roles where geographical mobility is common. Critics contend that it disincentivizes relocation and can hinder workforce mobility, especially for lower- and middle-income earners, by increasing their tax liability. The suspension of the deduction also complicates tax filings for individuals who move, as they must now accurately report these reimbursements as income rather than simply excluding them.
Moving Expense Reimbursement vs. Relocation Package
While often used interchangeably, "moving expense reimbursement" is a specific component of a broader "relocation package."
Moving expense reimbursement refers strictly to the funds provided by an employer to cover direct costs associated with physically moving household goods and personal effects, and travel expenses to the new home. This is the financial compensation for verifiable expenses like hiring movers, renting a truck, or the cost of temporary storage of belongings.
A relocation package, on the other hand, is a more comprehensive set of benefits offered by an employer to assist an employee with all aspects of relocating for a new job. Beyond just moving expense reimbursement, a relocation package can include a wide array of support, such as:
- Temporary housing allowances: Covering lodging costs while the employee searches for a permanent residence.
- House-hunting trips: Expenses for visiting the new location to find housing.
- Real estate assistance: Help with selling the old home or buying/renting a new one, which might include covering closing costs or realtor fees.
- Spousal career assistance: Aid for a spouse in finding new employment.
- Lump-sum payments: A single payment given to the employee to cover all relocation costs, offering flexibility but requiring the employee to manage expenses and potential tax implications.
The key distinction lies in scope: moving expense reimbursement covers the direct costs of the physical move, whereas a relocation package encompasses a broader range of financial and logistical support services designed to ease the entire transition for the employee and their family.
FAQs
1. Are moving expense reimbursements always taxable?
For most non-military taxpayers, moving expense reimbursements received from an employer for moves occurring between 2018 and 2025 are considered taxable income. They are included in wages on Form W-2. An exception exists for active-duty U.S. Armed Forces members, whose qualified moving expense reimbursements remain non-taxable4.
2. Can I deduct my moving expenses if my employer doesn't reimburse me?
No, for most taxpayers, the federal deduction for moving expenses is suspended from 2018 through 2025, regardless of whether they are reimbursed by an employer or pay the expenses themselves3. The only exception is for active-duty military personnel moving due to a permanent change of station.
3. What types of expenses are typically covered by moving expense reimbursement for military members?
For eligible active-duty military members, qualified moving expenses typically include the cost of moving household goods and personal effects, and transportation and lodging expenses for the individual and their household members while traveling to the new home. Meals are generally not deductible2. The Internal Revenue Service provides detailed guidance in Publication 521.
4. How does the Tax Cuts and Jobs Act (TCJA) affect moving expense reimbursement?
The TCJA suspended the federal tax deduction for moving expenses for most non-military taxpayers for tax years 2018 through 2025. This means that, for these taxpayers, employer reimbursements for moving expenses are now included in their gross income and are subject to taxation, whereas previously they might have been excluded. The law did preserve the exclusion and deduction for active-duty military members1.
5. What is the difference between an accountable plan and a non-accountable plan for reimbursements?
An accountable plan requires employees to substantiate their expenses (e.g., provide receipts) and return any excess reimbursement. Under such a plan, properly substantiated reimbursements are not included in the employee's gross income (if they are for deductible expenses). A non-accountable plan does not require substantiation or repayment of excess amounts; therefore, all payments under a non-accountable plan are generally included in the employee's gross income and are subject to employment taxes. While moving expenses are generally taxable for non-military individuals from 2018-2025 regardless of the plan type, understanding these classifications is still important for other types of employer reimbursements.