Many employers pay moving expenses for their employees when a move is required for work-related reasons. This moving expense benefit can take several forms. A common practice is for the employee to pay for the move themselves and then submit receipts to the employer for reimbursement.
One question many employees have is, are these reimbursements taxable? How should employees handle moving benefits at tax time, and how do the tax implications affect negotiations they have with employers?
This post will describe moving expenses reimbursements and the federal tax implications.
What Are Moving Packages?
Moving packages are intended to cover or help with the costs of moving to a new location for your work. Employers may offer this benefit as a hiring incentive to new employees or give it to existing employees as added incentive to move.
Your employer may offer a moving package with direct payment to a commercial moving company or hire a relocation service to carry out your move. Alternatively, they may reimburse you for your moving expenses. They either give you a lump sum to cover your moving costs or pay you based on claims and receipts you file after the move.
Moving Packages are Taxable
Moving benefits are usually taxable regardless of which form your moving package takes. The 2017 Tax Cuts and Jobs Act made moving packages taxable for most people. Before 2017, employees’ moving expense benefits were not taxable; furthermore, people were allowed to deduct moving expenses subject to certain conditions.
When an employer pays moving expenses for a relocating employee, the employer must report the benefit amount on the employee’s W-2 statement. The employee must pay taxes on this amount in addition to their annual salary.
For example, if the employee paid $10,000 for a move and was reimbursed by their employer, this amount is reported as taxable income. Even if the employer paid part of the moving expenses directly to a moving company, storage company, or airline, the moving expenses amount is considered taxable.
Many Tax Cuts and Jobs Act provisions are scheduled to expire in 2025, but it is unknown whether the law or any of its conditions will be extended.
How Moving Expenses Are Taxed
If you receive a reimbursement from your employer after claiming work-related moving expenses, the refund may be subject to withholding. If you have 20% of your pay withheld for taxes, then that percentage may be withheld from your moving reimbursement. If you claim $5,000 you may receive only $4,000. Even if the employer paid the moving company directly and you didn’t receive any funds, the moving expense your employer paid is still considered taxable income. You may wish to consult a tax advisor for help in figuring out how to plan for this additional tax.
To offset the taxes on moving benefits, some employers add extra to account for taxes. So if you claim $5,000 the employer may pay you $6,250 to cover your taxes. This is called a relocation gross-up. It costs your employer more, but relieves you from having to plan for and pay additional taxes.
Moving Expenses Are Not Federal Tax Deductible For Most People
For most people, unreimbursed moving expenses are not tax deductible on federal income taxes. The main exception is active-duty military members moving for a permanent change of station.
How to Evaluate a Relocation Package
Moving is usually expensive, and moving packages don’t always cover the full cost. The average moving package costs employers between $19,309 and $24,216 for renters and between $72,627 and $97,116 for homeowners.
Relocation packages can range from a few thousand dollars up to $100,000. Top executives generally get the most extensive relocation packages. But skilled workers in competitive industries and new hires in tight job markets are often offered or might be able to negotiate relocation benefits as part of their hiring or promotion packages. A relocation package is undoubtedly an added incentive if you’re considering a new position or transfer requiring you to move.
But you need to carefully compare the specifics of the relocation package to your total costs. You need to understand your offer and compare it with your expenses. Consider both the costs of the move itself and the costs after the move. Some areas of the country have higher living expenses than others.
Also, find out details of the relocation agreement, so you can be sure to use only approved vendors or stay within spending guidelines. If your relocation package won’t cover all your moving expenses, consider how much the move will cost out of pocket and whether the job opportunity will pay off in the long run. Also be sure to factor in taxes on relocation benefits. Relocation benefits are part of your overall salary. Understanding how they work is crucial in evaluating a job offer.
We hope you found this post, Are Reimbursed Moving Expenses Taxable? useful. Be sure to check out our post, Common Factors That Affect Your Moving Costs for more great information.