The Tax Treatment of Moving Expense Reimbursements

Background Information

The tax code provides that gross income doesn’t include qualified moving expense reimbursements. However, a provision that was added by the Tax Cuts and Jobs Act (TCJA) suspended the tax-free exclusion for qualified moving expense reimbursements from an employee’s income for tax years beginning after December 31, 2017, and before January 1, 2026. However, the exclusion is still available for U.S. Armed Forces members on active duty who move because of a permanent change of station.

The IRS and the U.S. Department of the Treasury have received questions regarding these two situations:

1. An employer pays a third party moving service provider after December 31, 2017, for moving services paid to an individual prior to January 1, 2018; and

2. An employer reimburses an individual after December 31, 2017, for expenses incurred in connection with a move by the individual prior to January 1, 2018.

Timing is Everything

Stakeholders noted that given the time of the year when the TCJA was passed (December of 2017), individuals who relocated in 2017 but who didn’t receive payment or reimbursement until 2018 wouldn’t have anticipated that the expected payment or reimbursement could become taxable if received this year rather than last year.

The TCJA provision that lists the effective date for the suspension of the exclusion from income for qualified moving expense reimbursements isn’t specific. That is, it doesn’t say whether the suspension applies to all payments or reimbursements received after December 31, 2017, regardless of when the move occurred, or, alternatively, only to payments or reimbursements for expenses incurred for moves that occurred after December 31, 2017.

The IRS now says that the TCJA provision only applies to payments or reimbursements for expenses incurred for moves that occurred after December 31, 2017. To qualify for the exclusion, the reimbursements or payments must be for work-related moving expenses that would have been deductible by the employee on the employee’s personal income tax return if the employee had directly paid for them prior to January 1, 2018. The employee must not have deducted the expenses in 2017.

What about employers that have included the amounts in employee wages or compensation for purposes of federal employment taxes, and have withheld and paid federal employment taxes on these amounts? They may use an adjustment process under a tax code provision (Code Section 6413) or a refund claim process (under Code Section 6402) to correct the overpayment of federal employment taxes on these amounts.
If you still have questions about the deductibility of your reimbursed moving expenses, or your employees’ expenses, contact your trusted tax advisor.