Summer is the peak season for job relocations, which means many employees will soon be given their marching orders and a chance to negotiate financial assistance for the move.
How much assistance an employee can expect varies sharply from company to company. Even within a particular company, how much you’ll get often depends on what you are able to negotiate.
Whether you’re a new college grad moving to your first job or a longtime employee being transferred to a better assignment, the negotiating strategy is simple: try to get as much of your moving costs reimbursed by your employer as possible because you won’t get much help from the government.
The deduction for job-related moving expenses was gutted last year as a result of the 1993 deficit-reduction law. With deductions now permitted for only basic moving expenses, employees will find the tax savings offset only a fraction of what it typically costs to relocate.
Even for those workers who are lucky enough to have an employer who will reimburse all moving expenses, the new law has consequences. Because of the scaled-back deduction, employees will find more of their reimbursements subject to income tax. So unless your employer provides an extra reimbursement to cover the additional taxes, the move could end up costing you hundreds or thousands of dollars out of your own pocket.
What’s still deductible
The only expenses that are still eligible for the moving deduction are the cost of packing and shipping your household goods, in-transit storage and travel to your new location, including lodging en route.
Gone are deductions for meals, pre-move house-hunting trips and temporary living expenses in the new location. Also extinct are deductions for real estate sales commissions or any other costs associated with selling your old home or buying a new one. Renters can no longer deduct the cost of terminating an unexpired lease or finding a new apartment.
But even the old law left huge gaps. For most employees, house-hunting trips, meals, temporary living expenses, broker sales commissions and closing costs ran many times more than the old law’s $3,000 allowance. In fact, the average cost of relocating an employee who owns a home now exceeds $50,000, according to the latest survey by the Runzheimer International consulting firm.
Thus, many employees will wind up with tens of thousands of dollars in moving costs that aren’t deductible.
To illustrate the impact, say you and your family spend $13,000 to ship your belongings and travel to your new job location, and incur another $20,000 in various other expenses, including sales commissions, closing costs, house-hunting trips and temporary living accommodations.
If you’re in the 28 percent tax bracket, your tax savings from the moving deduction would amount to $3,640 ($13,000 in deductible expenses multiplied by 28 percent). In other words, the government would be subsidizing only about 11 percent of your $33,000 relocation bill.
Short-distance moves
If you’re relocating within the Chicago area, you probably won’t be able to write off a cent of your moving expenses.
To qualify for the moving deduction, your new job site must be at least 50 miles farther from your old home than your old job site was from your old home. The mileage test under the old law was only 35 miles.
So if you now live and work in Oak Park but are being transferred to a branch office in Lake Forest, it may seem a practical necessity to buy a home in the northern suburbs so you won’t have to suffer the long commute every day. But you won’t be able to deduct any of your relocation expenses because the distances involved fall short of the 50-mile test.
Workers who are forced to pay their own relocation expenses are hardest hit by the cutbacks in the moving deduction.
But even if your employer reimburses every dime of your moving expenses, you could still end up losing a lot of money on the move if you don’t receive an additional reimbursement from your employer to cover the tax consequences of the relocation.
The reason is that reimbursements for moving expenses that aren’t eligible for the moving deduction, such as pre-move house-hunting trips, are subject to tax. Your employer will include such reimbursements on your W-2 form, and you’ll need to report the payments as income on your tax return.
So to come out even on the move, you’ll need to obtain an additional reimbursement for the extra tax you’ll incur, including the tax you’ll have to pay on the additional tax reimbursement.
Mercifully, most employers do provide additional reimbursements to cover at least part of the tax consequences.
One new benefit of the new law is that the moving deduction is now available to everyone. Until last year, the tax break was an itemized deduction. But the new law made the moving deduction an “adjustment to income,” which can be claimed regardless of whether you itemize.
One tax problem that most companies won’t help mitigate is the capital gains tax that often afflicts employees being transferred to a city with lower housing costs.
For example, say you’re selling your $175,000 home in Chicago because you’re being transferred to Phoenix, where you’ve found a new home for $130,000. You may be delighted by the prospect of lower monthly payments. But you’ll need to pay capital gains tax on profits from the sale of your Chicago residence. The tax law permits capital gains tax to be deferred only if you buy another home that costs at least as much as the one you sold.
