Relocation Tax Updates
& Trends
Presented by
Peter Fonseca, CRP
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Federal Tax Issues, Including
Common Deductions and Credits
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IRS Concerns & Audits
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State Withholding Issues
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Relocations & Temporary Assignments
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Gross-Up Policy Recommendations
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Common Gross-up Audit Mistakes
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In 2013, the American Taxpayer Relief Act extended
the Bush-era tax cuts permanently, but with the
addition of a new top bracket/rate.
Tax rates remain the same
(10% - 39.6%).
Brackets have been slightly
adjusted for inflation.
Slight increase in the value of standard deductions and
exemptions:
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$6,300 if SNG or MFS
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$12,600 if MFJ
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$9,250 if HH
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$4,000 per exemption
For higher incomes in 2015, phase-out occurs for AGI’s
exceeding:
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$258,250 if SNG
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$309,900 if MFJ
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$284,050 if HH
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$154,950 if MFS
Recommendations: Consider phaseouts in gross-up
calculations. Also, use itemized deduction estimates (for
homeowners) and standard deductions (for renters).
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Most companies calculate year-end gross-up
based upon estimated taxable income, after
reducing AGI by exemptions and either
standard deductions or estimated itemized
deductions.
Standard/itemized deductions lower taxable
incomes and possibly tax/gross-up rates.
Most homeowners are itemizers and most
renters are non-itemizers.
If used standard deductions for all, then likely
will over gross-up many homeowners.
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Legally married same-sex couples generally
must file as married starting in 2013 (Rev.
Ruling 2013-17).
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Business rate increased from $0.56/mile
in 2014 to $0.575/mile in 2015.
Final move excludable rate decreased
from $0.235/mile in 2014 to $0.23/mile in
2015.
Charitable rate remains at $0.14/mile for
2015.
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2015 supplemental withholding rate
remains at 25% (39.6% for YTD
supplemental payments exceeding
$1,000,000).
Recommendation: If you use supplemental rates
during the year, then calculate year-end gross-up
based upon marginal rates. Pass the difference to
payroll as a ‘delta report’.
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OASDI (Social Security) rate remains at
6.2%.
OASDI cutoff increased from $117,000
in 2014 to $118,500 in 2015.
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For many years, the Medicare rate has been 1.45% with no
income threshold.
Starting in 2013, there was an “Additional Medicare Tax”
of 0.9% for higher incomes. This remains in effect for 2015
For withholding purposes, the additional tax is required
for Medicare wages exceeding $200,000, regardless of
marital status.
When filing the 1040 Federal tax return, Medicare is
recalculated based upon total Medicare wages on Form
8959. The thresholds are $200,000 if SNG or HH, $250,000
if MFJ, and $125,000 if MFS. Any additional tax due or
overpayments made are reconciled on the tax return.
Example 1:
Married Filing Jointly
$250,000 in Medicare wages, with no spousal or outside income
Paid $450 in additional Medicare withholding ($50,000 x 0.9%)
Federal tax return – threshold of $250,000 – will get $450 credit
Example 2:
Single
$150,000 with company A and $150,000 with company B
Didn’t pay additional Medicare withholding
Federal tax return – threshold of $200,000 – will owe an
additional $900 in tax ($100,000 x 0.9%)
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A new 3.8% Medicare tax on certain
investment income is imposed for taxpayers
with MAGI exceeding these thresholds
($200,000 if SNG or HH, $250,000 if MFJ,
and $125,000 if MFS).
The tax is due on the lesser of net
investment income versus MAGI over these
thresholds.
Must complete Form 8960.
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$300,000 of MAGI
$70,000 of net investment income
Married Filing Jointly
The lesser of unearned income ($70,000) and
MAGI over threshold ($300,000-$250,000) is
subject to 3.8% tax.
$50,000 x 3.8% = $1,900 NIIT
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First-time homebuyers (and some repeat
homebuyers) were eligible for a tax credit of
up to $8,000 for homes purchased between
4/9/08 and 9/30/10.
2009/2010 credit: If own home for 3+ years,
then no payback required.
2008 credit: Similar to no-interest loan, paid
back in equal installments over 15 years. If
sell prior to paying back, might need to pay
back the balance on that year’s tax return and
complete Form 5405.
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Couple bought home on 6/1/08 for
$300,000 and received $7,500 credit
(paid back over fifteen years).
Sell home on 10/1/14 – may need to
pay back the balance ($5,500) on that
year’s tax return, rather than over the
following eleven years.
How to handle?
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Companies should not reimburse
employees if they are required to
payback the credit.
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Had the employee not moved they still would
have been required to repay the credit over the
15 year term. By selling the home earlier they are
only required to accelerate the payments.
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Exclusion on gain of up to $500,000 if
MFJ, $250,000 if SNG.
Must live in home for at least two of the
last five years.
If moved prior to two years, can take a
portion of exclusion if moved under
certain scenarios.
Taxable gains may be subject to the 3.8%
Net Investment Income Tax as net
investment income.
Loss on sales are not deductible!
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Originally designed in 1969 to stop the top 155
American high-income earners from paying little or
no tax. It now impacts tens of millions.
Never adjusted for inflation until recent years with
one- and two-year patches.
Finally, the American Taxpayer Relief Act of 2012
permanently added annual inflation adjustments for
the exemption amounts.
For 2015, the exemptions are $83,400 if MFJ, $53,600
if SNG or HH, and $41,700 if MFS.
Very complex calculation. Use Form 6251.
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Do not attempt to factor in the AMT into your
Gross-up calculations.
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The calculation of AMT will vary between taxpayers based
on salary & specific deductions they may be taking.
Allow your transferees to complete their tax returns.
After they have completed their return you can have
a gross-up audit performed to verify if the AMT tax
negatively impacted them.
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Moving Expenses: Transit, Storage and Final Move
Expenses
PMI – Deduction has been available since 2007.
Currently unavailable in 2015. but likely to be extended.
Points/Interest & Taxes – Deductible on the Schedule A.
Sales Tax Deduction – Available since 2004. Currently
unavailable in 2015, but likely to be extended.
Recommendation: Consider the sales tax deduction in
gross-up calculations.
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Education Deductions and Credits –
American Opportunity Tax Credit,
Lifetime Learning Credit, and tuition
and fee deductions. Credits taken on
Form 8863 and deductions on Form
8917.
Child Tax Credit - $1,000 / dependent
under age of 17. Extended indefinitely.
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$1,000 tax credit has been available since 2003.
Must be dependent and under age 17 at end of
tax year.
Phases out for gross income exceeding
$110,000 if MFJ, $75,000 if SNG or HH, and
$55,000 if MFS. Lose $50 for every portion of
$1,000 over limit.
Example: $140,000 gross income, MFJ, 2
dependents under 17. Will lose $1,500 of
credit; can only claim $500 credit.
Recommendation: Do not gross-up at year-end!
Why?
• Based upon total income including outside &
spousal income.
• Would likely over gross-up or under gross-up
many by $1,000 or more.
How to handle?
• Let transferees complete tax returns first. If they
feel they deserve additional gross-up, let them
come to you then.
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What are your options if an employee
feels they lost any of these credits due
to their relocation.
Have a Gross-up audit performed on the
employee’s tax returns to determine the true
loss.
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In cases the relocation may have only caused a
portion of the credit loss or no loss at all. An
audit can determine the true impact.
1. Part year and non-resident state returns
prepared incorrectly.
2. Preparer is unfamiliar with the company’s
gross-up policy. Some taxable expenses might
not be grossed up.
3. Spousal and outside income might not be part of
the company’s gross-up policy.
4. New residence points are incorrectly deducted
on the “without move” side.
5. Form 3903 prepared incorrectly.
6. State and local gross-ups are incorrectly
deducted on the “without move” side.
7. AMT Tax and its complexity during audits.
8. Many other areas (ie credit and deduction
phaseouts) not typically grossed up at year-end.
The company may/may not decide to include as
part of audit.
9. Failure to recapture any excess FICA tax
withheld.
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In most cases, withholding is required in
work state.
In most cases, income tax is owed in work
state, with non-residents taking a tax
credit on their home state’s income tax
return.
Nine states have no income tax on earned
income.
Exceptions are states with reciprocal
agreements.
D.C.
Illinois
Indiana
Iowa
Kentucky
Maryland
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Michigan
Minnesota
Montana
New Jersey
North Dakota
Ohio
Pennsylvania
Virginia
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West Virginia
Wisconsin
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Wisconsin
West Virginia
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Virginia
Pennsylvania
Ohio
North Dakota
New Jersey
Montana
Minnesota
Michigan
Maryland
Kentucky
Iowa
Indiana
Illinois
D.C.
State
Reciprocal
Agreements
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No state income tax on earned income: AK,
FL, NV, NH, SD, TN, TX, WA, and WY
Don’t allow itemized deductions such as
points or interest & taxes: CT, IL, IN, LA*,
MA, MI, NJ, OH, PA, RI, UT*, WV, and WI*
(* - portion deductible/credit)
Allow deduction on Federal tax: AL, IA, LA,
MO*, MT*, OR* (* - has limits)
Allow deduction/exclusion for final move
meals: PA and NJ
Distance test of 35 miles: PA
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Assignment expected to last no more than one year is
treated like a business trip.
If expected to last longer than a year, then treated as
relocation.
Many business trip expenses are non-taxable:
− Trip at start and end of assignment
− Transportation, lodging, meals
− Some miscellaneous expenses
− Certain return trips
− Option of per diem allowances in lieu of receipted
expenses (www.gsa.gov for domestic tables and
aoprals.state.gov for int’l locations; starting in 2012,
IRS Pub. 1542 no longer publishes rates).
− OR high-low per diem rates (see IRS Notice 2014-57).
− Employee’s Visa, passport, language training
− Family expenses are taxable!
IRS budget has been cut significantly over the past few
years. Proposed modest increases for 2015.
- Individual taxpayer audits down to 0.8% in 2014.
- Corps with $10M assets down to 4.2%.
IRS concerns:
- Identity theft tax refund fraud.
- Affordable Care Act – Penalties for not having
insurance.
Focus of audits:
- The rich and their entities.
- Partnership returns.
- Employment taxes.
Employment taxes:
Employee vs. independent contractor.
Form 1099 compliance.
S corporation reasonable compensation issues.
Cash businesses.
Other items to be careful of:
Not reporting taxable relocation expenses, or waiting until
the end of the year to report them vs. pay period basis.
Penalties can be significant.
Should be careful about reimbursing expense at year-end
but not reporting to payroll until the following year.
Temporary assignments.
Peter Fonseca, CRP
pfonseca@orionmobility.com
203-563-2152
www.orionmobility.com