New 2011 Tax Law Changes – Their
Impact on Relocation Tax Gross-up
Policies and the Transferee
GWERC
12/7/11
Presented by
David S. Oltman, CRP
Relocation Taxes, LLC www.relotax.com
New 2011 Corporate Tax & Payroll
Issues
• Tax Credits lost on tax returns – Education Credits and American
Opportunity Credits – IRS Form 8863 (Phase-out range “Single” $80,000
- $90,000 and “Married Filing Joint” $160,000 to $180,000), Child Tax
Credits ($110,000, $130,000, $150,000…). See RTA p. 11. Repayment of
Home Buyer Tax Credit – IRS Form 5405 if moved again within 3 years.
All these issues can effect the transferred employee by several hundred
dollars, to several thousand dollars, to well over $10,000+. See RTA p. 44.
Recommendation: Only after doing a complete gross-up audit in 2011 of
the employee’s 2010 tax return. Cost usually between $250 to $395 per
audit.* The importance of proper tax preparation can not be over
stated. For example a FL to OH move – and not allocating state wages
properly.
*Business Expense. Not taxable.
New 2011 Corporate Tax and Payroll
Issues
1)
AMT Tax (Alternative Minimum Tax) effects – could effect 10 times more taxpayers, “Target”
result is the corporate transferee. (higher gross-ups). See RTA p.10 & page 44
2)
All Tax Brackets where indexed for inflation (significant lower gross-ups in 2011 could be
higher in 2012) See RTA p.11. Brand new – lower phase-outs of itemized deductions (went
from 3% to 2% to 1% to 0% in 2010 and 2011 - and lower phase-out for personal exemption
amounts 1/3 reduction and a new minimum of $2,333 ($3,700 x. 66.67%) per personal
exception. 0% in 2010 and 2011. Average savings of $375/move.
Potential 2013 higher tax rates – gross-up impact. 60% total tax rate = a 150%
gross-up.
3)
How states are catching employees who do not report their wages. Tax Amnesty. Hotel &
credit card gas receipts. IRS Employment Tax Audits Begin in 2010 and will run
through 2013.
5)
New State Sales Tax Deduction – Applies mainly to transferees in nine (9) no income tax
states. AK, FL, NV, NH, SD, TN, TX, WA & WY (lower gross-ups) See RTA p.12 Average
savings of $600 per move
6)
Reduced Home Sale Exclusion & New Home Buyer Tax Credit ($8,000/$6,500). Very Complex.
See RTA – p.44 IRS Form 5405 – plus new “Repayment Letter” being sent by IRS based on
address changes. If house turned into rental – credit must be repaid.
7)
New HUD-1 Form – Special attention should be given to line 801 – See RTA page 36.
2011 Hot Federal/State Tax Issues
• Temporary Assignments – 1 year rule – business vs. taxable. See
RTA pages 8 & 9 also Revenue Ruling 93-86. New Trend to
“reconcile” state taxes – “Keep Employee Whole For State Income
Tax ”. New Proposed Tax Bill – H.R. 1864 – “30 Day Rule” (was
H.R. 3359 & 2110 - 60 day rule). “Mobile Workforce State Income
Tax Fairness and Simplification Act”. The methodology used is to
calculate what the employee “would have paid” in Federal and
State/Local taxes (in the “live state”) – then compare that amount to
what the employee “actually paid” in Federal and State/Local taxes
(in the temp. “work state”). The difference between those two
amounts is the amount due the employee. Issues to consider:
–
–
–
–
–
a)
b)
c)
d)
e)
Any State income tax dollars that were “advanced” or “loaned”
The taxability of “advances” or “loans”
Multi-state tax credits taken or not taken on state tax returns
Non-Resident and Part-Year Resident state tax returns
Administration of the program – “loans”, “advances” and “repayments”
* Proposed Effective Date retroactive to 1/1/2013 – See RTA
p. 13
2011 Tax and Payroll Issues
• Global Assignments – Stealth Expatriates – tracking issues. See RTA
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pages 14 thru 19.
E-Solutions – New trends – Lots of software on the market – average cost
$50 - $75 per move. From Gross-ups to Int’l Hypo Taxes, to Lump Sum
software.
US Government (WITA/RITA) - Sen. Grassley - GRAB. See RTA pages 38 & 39
Capital Losses on home sales are NOT deductible. See RTA page 2
The Mortgage Forgiveness Debt Relief Act. “Short Sales” no longer
taxable, Negative Equities and Loss on Sales.
IRS Revenue Ruling 2005-74 (updates 72-339) – Corporate home sale
procedures clarified. Third Party home sales NOT taxable.
First Time Homebuyers Credit: $8,000/$6,500 (MFJ $225,000; SNG
$125,00) start of phase out range. Three year pay back period. See IRS
Form 5405 Very complex. Three (3) year payback provision. IRS has just
started sending out repayment request letters, to employees who have
“changed their address” or “moved” or have “rented their house”.
Commuters – Expenses & Salary taxable in both “live” and “work” states.
Making Work Pay Credit: – Between $400 to $800 credit Phase out range
(Single $75,000 - $95,000 and then MFJ $150,000 - $190,000) Replaced
in 2011 by lower FICA 6.20% to 4.20%
Average Gross-up Percents – Could go from 60% to over150% based on
proposed 2013 tax changes.
IRS 2011 Tax Forms:
• RTR - "Relocation Tax Report" - replaces old "IRS Form 4782“. See
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RTA p. 25
3903 - "Moving Expenses" - taxpayer required. See RTA p. 29
Sch. D - "Capital Gains and Losses" - replaces old "IRS Form 2119"
New 2011 Federal, State, Local and F.I.C.A. (Social Security – 4.20%)
$106,800 & Medicare 1.45% unlimited) tax brackets. The 2011
FICA/Medicare brackets – have changed. The longtime OASDI rate for
the employee of 6.20% has changed in 4.20% in 2011. The employer
rate remains 6.20%. This represents a potential several hundred dollar
per move gross-up savings.
New 2012 FICA Limit $110,100.
States that follow the pre-1994 "rules" allowing the final move meal
deduction / exclusion.
NJ* / PA**
•
•
* Allows only a 100% exclusion of Final Move Meals on NJ-1040
** Allows a 100% deduction of Final Move Meals on PA-40R-UE-1
Penalties for Failure to Withhold taxes on a
timely basis.
• Most all relocation expense reimbursements or
supplemental wage payments are subject to withholding
at the time of payment. Most companies use the
Supplemental rate of 25% and apply a gross-up
percentage. Accountable Plan rules apply, using the
30/60/120 rule. Taxable moving expenses (lump sums)
are treated as if they were paid under a "nonaccountable" plan. An average penalty of $8,000 per
move could cost a company that relocates 200
employees per year, 1.6 million dollars for each year of
non-compliance.
Tax Saving Strategies (Withhold/Gross-up)
(1) When ever possible, always look for a business purpose for an expense. For
example, Moves less than 1 year (temporary assignments), a Pre-employment
physical, House Hunting Trips as business trips (breakout spouse expenses). Use
a TP Home Sale Company or Qualified In-House Program. Tax Gross-up Savings
over $9,000 per move.
(2) Have trained accounting/relocation tax expense professionals tax code and
audit all expenses entered from the transferee's expense report. Average cost is
$300 to $500 per move
(3) Do not include either Van Line or Final Move expenses in a "Lump-Sum"
allowance. Why? Because not taxable when receipts are provided. Employees
can still deduct their moving expenses even if they receive a lump sum that is
taxable and grossed-up. Lumps Sum Software $50 to $75 per move.
(4) Re-capture any FICA overpayments – Year-end “true-up” – only adjust for
“negatives” differences. Tax Gross-up Savings over $1,000+ per move.
(5) Explain/Educate employees with regard to how their gross-up was calculated.
Priceless!!!!!
Hot 2011 Relocation Trends
• Year-end “true-up” or “difference” or “delta” calculation.
Negatives only “adjustments”. Big savings in gross-ups Average
gross-up is over $10,000. (Average savings over $2,000
per move).
• Only gross-up at supplemental rate [ 25% ], let transferees
come back and request more. Gross-up Audit after the fact.
(Average savings over $1,000 per move).
• Companies no longer automatically grossing-up for FICA
•
•
(4.20% + 1.45%) $106,800 maximum.
Lump Sums – Becoming very popular, software is available. $50
- $75
Expense Management Audits – Relocation Accounting Audits.
(Average costs $395 per audit or several thousand
dollars to audit a “batch” of records).
• Reconcile State Taxes for employees who go on a temporary
assignment or Commuter assignments. Gross-up wages for
extra state taxes when needed. Gross-up Audits – for AMT,
Home Buyer Credit and Other Lost Credits. Cost $395 per move .
10 Things Every Employee Should Know
Before Considering a Move
1) Income will be inflated due to moving expenses paid by your company. Make
sure that federal and state withholdings are sufficient to cover the increase.
Also, the year after the move, most transferees are more likely to be under
withheld. If in doubt, contact your tax advisor. See RTA p.7 Also, If your
company paid your Van Line bill, you can NOT deduct it on IRS Form 3903. If
you rent out your house, you will have to repay the Home Buyer Tax Credit.
2) Make sure that a state W-4 form has been prepared and given to your payroll
department so that withholding is being taken out in the proper state. YOU
ARE REQUIRED TO HAVE WITHHOLDING TAKEN IN THE STATE THAT YOU
WORK IN, EVEN IF YOU ARE A RESIDENT OF ANOTHER STATE! This should
become effective the first paycheck received in the new place of employment.
See RTA p.7, 12 and 13
3) In addition to the state, your new city may also require tax to be withheld.
Review your first pay stub to make sure that this is being done (if applicable).
4) Keep in mind that excess FICA withheld from two or more employers is
refundable, Line 69 IRS tax form 1040. Affects both working spouses.
5) You have up to two years to satisfy the time test, to establish permanent
residency, in order to deduct moving expenses.
10 Things Every Employee Should Know
Before Considering a Move
6) Special costs, that are unique to you, are also deductible as
moving expenses such as pets, horses, aquariums and tips paid
to “movers & packers. No limit on the number of cars that can be
moved and deducted. See RTA p.4
7) The cost of moving students, from their college to the new
location, is deductible.
8) In the year that you move, remember that any non-amortized
points on a refinanced loan can be deducted if you sell your
house. See RTA p.8
9) Premature distributions from pension plans are not only taxable
as income but incur a 10% penalty unless rolled over within 60
days. There is often a misconception how the rules for first time
homebuyers work. Also in the year of a move, income is inflated
and this is probably not a good time to take an early distribution.
10) The year after the move, significant potential for under
withholding penalties exist. It could be hard to meet any of the
safe harbor rules: Owe<$1,000, or pay at least 100% of last
year’s liability, if AGI is >$150k, then pay 110% of last years
liability. See RTA p.7
Gross-up Audits
“With/Without Move Analysis”
Common mistakes CPAs make with transferees'
tax returns with regard to “Keeping The
Transferee Whole"
(1) The tax return is prepared incorrectly!!!. Excludables (W-2 Box 12 – Items
preceded by the letter “P”) are not properly reported and carried forward to
the 1040 Federal tax return. IRS Form 3903 “Moving Expenses” is not
completed properly, or not at all. Points / Loan Origination fees are not
deducted properly on IRS Schedule A. Part year and non-resident State
Tax Returns are not completed properly, or not at all.
(2) Accountant is not familiar with the company's relocation tax gross-up policy.
For example, what expenses are Grossed-up and which expenses are not
subject to tax assistance.
(3) Other income (spouse income) is used to establish tax brackets both "with"
and "without" the move.
(4) Points are deducted both "with" and "without" move.
Gross-up Audits – With/Without Move Analysis
(5) State and Local Gross-up tax dollars are deducted "with"
and "without" the move.
(6) Recapture Excess FICA taxes Withheld.
Comment: If the transferee "partially loses the benefit of their Standard
Deduction", or the new “General Sales Tax Deduction”; in other words,
is forced to itemize; the transferee has been adversely affected.
For example, the maximum "Standard Deduction Loss"
exposure:
Standard Deduction Married Filing Jointly
$11,600 (MFJ)
.25%
$ 2,900 "Extra Tax Owed Because of Move"
Additionally, transferee’s who exercise stock options, have rental properties, AMT
and generally more complex tax issues should consider having “professional” tax
preparation and review” by trained relocation tax experts.
Money Saving Gross-up Policy
Administrative Opportunities
• 2011 GROSS-UP DECISIONS
YES/NO
Additional Cost Per Move*
• Use Tax Tables
_____
Several Thousand Dollars
• State Taxes
_____
Moved To / From / Both ?
• Include Fed. in State
_____
$350
• Local Taxes
_____
$150
• F.I.C.A. Taxes
_____
SS / Med / Both SS $1,000 /
$250
• F.I.C.A. Circular Logic
_____
$400
$1,000
Medicare
Money Saving Gross-up Policy
Administrative Opportunities
– 2011 GROSS-UP DECISIONS
YES/NO Additional Cost Per Move*
– Deduction/Exempt. Phase-out
____
$275 (No 2011 phase-out)
– Assume Itemized Deductions
____
$600 (New GST)
– Gross-up "Unqualified" Moves
____
$5,800
– Misc. Expense Allowance
____
$4,000
– COLA / MIDA
____
$6,000
– $0.555/$0.235 cents per mile
____
$150
– Loss on Sale
____
$10,000 to $50,000+
– AMT, WPC, First Time HB Credits
____
$1,000 - $20,000+
– Annualize New Hire Salaries
____
Several Thousand Dollars
Money Saving Gross-up Policy
Administrative Opportunities
2011 GROSS-UP DECISIONS
Per Move*
YES/NO
Additional Cost
• Look at Non-itemizers (Renters)
____
$500+
• Economic Stimulus Package
____
$0 to $2,000+
• Third Party Home Sale Company
____
$9,000
• Other
____
58% to 60% of
Benefit Paid - Commuters
• The dollar amounts presented are estimates only. The actual dollar amount
will vary based on the total cost of the move, what state is used for tax
purposes, and of course the company's relocation tax gross-up policy.
* Savings documented well over $2,000 per move.
Copyright Ineo/Relocation Taxes, LLC 2011
Contact Information
David S. Oltman
Chief Compliance Officer & Company Co-Founder
Ineo/Relocation Taxes, LLC
372 Danbury Road
Wilton, CT 06897
(203) 529-3020
Oltman@relotax.com – e-mail address
www.relotax.com