How Does Relocation Assistance Affect Taxes?
The relocation of employees can be very time consuming and expensive and the tax impact is sometimes an “after thought.” Relocation packages tend to be customized, so there is not always one simple answer. The summary below reflects tax rules in place today and implications for U.S. federal individual income tax reporting.
Are company-paid moving expenses taxable?
We start by looking at the definition of a “qualified move” as defined by the Internal Revenue Service, which requires:
The move must be closely related in both time and place to the start of work at a new job location (work-related test).
The distance between the employee’s new principal place of work and old residence must be at least 50 miles greater than the distance between the old principal place of work and old residence, and the employee’s commuting distance must have increased by at least 50 miles (distance test)
In the 12-month period following the move, the employee must be a full-time employee for at least 39 weeks in that location or meet a qualified exception to the time limit (time test).
Certain moving expenses, paid or reimbursed by the employer, are not taxable under the definition of U.S. wage income. To qualify as “non-taxable,” the expenses generally must be accountable, substantiated and reasonable for the circumstances of the move. Expenses that can qualify as non-taxable include:
The transportation of household goods and personal effects (including in-transit storage and insurance expenses) from the old residence to the new residence. The costs of moving automobiles and pets are included in this category.
Note: Special rules apply for international relocations.
Travel expenses for the employee and household members from the old residence to the new residence (in-transit). These expenses usually include lodging, but not meals, during the trip. It is not necessary that all members of the household travel together at the same time.