It is now law...and this is a BIG deal!
So, it took a while, but we've have gotten through the 1,097 pages of the Republican tax bill, which was signed into law Friday morning by President Donald Trump. Yeah, that is right...one thousand (your eyes are slowly closing) ninety-seven (your eyes are almost closed) pages of tax ref...zzzzzzzzzzz!!!!! (your eyes are solidly shut). OK...wake up!
Honestly, no I did not read the entire thing. But we have been following it, reading and listening to many viewpoints, and discussing it over the last few weeks as this has developed.
So, let's just hit the big points that relate to corporate relocation and global mobility programs for now and figure out all those account-specific details after the holidays! There are many changes for individuals and businesses within this reform, but here are some of the latest points for global mobility professionals to consider as it relates to the new tax law.
Starting with BIG picture
If you only get this far, here is what you should take away at a minimum. From a corporate perspective, given the tax rate will drop 14 percentage points down to 21%, companies will pay much less corporate tax overall. This is nice from a corporate perspective. But the bill will impact relocation and mobility programs, and for most every company this will add cost to their programs. For companies that provide tax assistance (aka "gross-up") for taxable relocation expenses, these amounts will now be increased if a company makes no changes in policy for their tax assistance support.
Digging into it from a global mobility perspective
As expected, the bill does include a repeal of the deduction and exclusion for moving expenses, effective January 1, 2018, and applicable through 2025, at which point it would revert to current tax rules. This means:
- The costs for packing, shipping and delivering personal belongings (affectionately known as household good shipments or removals) will now be taxable.
- The first 30 days of storage along with the costs of moving the items in and out of storage will also now be taxable.
- Final move (en route) trip costs that were previously non-taxable (excludable) — think a portion of mileage reimbursement and airfare, for instance — will now be reported as taxable income.
- Duplicate housing interest and taxes, loan origination fees and points are also going to potentially be taxable.
The repeal makes the time and distance test to qualify expenses as excludable irrelevant now. The commute increase of 50 miles is no longer any sort of qualifier and neither is the time test, where a full-time employee used to have to work at least 39 weeks during the first 12 months of starting in the new location.
Companies likely to spend more on tax assistance
Employers will still have the same basic principle to consider with regard to how they would like to treat taxable expenses (either gross up at some level or withhold the taxes owed from the employee). But there will be an increased amount that will be considered taxable income now that the above will be considered taxable. However, offsetting this slightly, the flat supplemental withholding rates will be changing from 25% to 22%, which allows the company to spend slightly less (on gross-up) for each taxable dollar.
Per an Ineo Tax Act Summary:
"The supplemental rate for income over $1m will decrease to 37%. The regular supplemental rate will most likely decrease to 22%. This is not specifically addressed in the new law, however, per IRS Reg. 31.3402, the supplemental withholding rate cannot be lower than the third lowest federal tax rate, which is 22% for 2018. This will probably be addressed in more detail by the IRS in the coming weeks as they will release updated withholding schedules – expected February 2018."
For more related to the 2018 changes that will impact payroll, check out Ineo's Quick Guide to 2018 Federal Tax Information and Gross-up Percentages.
A sigh of relief as it relates to home sale programs
There is nothing in the bill that changes the current treatment of relocation home sale programs. Per the Worldwide ERC article linked below, "Costs incurred by employers/third parties in disposing of transferee homes purchased in a bona fide, fair market value transaction will continue not to be taxable to the transferee." Also of note is that the current exclusions for foreign earned income and housing are unchanged.
Considering the impact to relocating employees
The more challenging work to be done is to consider just exactly how each relocating employee is going to be impacted. The changing of interest rates at different levels and the changing of specific deductions throughout the bill will change the impact for each employee. There are some changes that must be considered with regard to itemized deductions and benefits. The mortgage interest deduction threshold is being reduced to $750,000 for mortgages from December 15, 2017, onward. Home Equity Lines of Credit debt (HELOC) will not be deductible any longer. There will also be a $10,000 cap on state and local property, sales and income taxes, which will likely have an impact on those living in high-tax states. This could impact recruitment of talent to those states.
Considering lump sums
Lump sum cash payments that are grossed up will cost the company slightly less for that gross-up amount. Lump sum payments where the company deducts taxes from the payment will result in a slightly greater net payment to the employee since the company will withhold at a slightly lesser percentage. The employee, however, will not be able to deduct those items that were previously excludable or deductible when filing individual taxes, which will likely create a negative net impact for employees receiving lump sums where taxes are withheld.
Heading into 2018
These new laws will affect both company policies and compliance requirements. As Worldwide ERC advises, most every company and relocating employee will be impacted. It will be important to work with your relocation management partner (like Plus) and tax partners to review the impact to both your program and your employees.
Start by considering these seven initiatives moving into next year:
- Work with these partners to reconsider your 2018 budget projections based on your anticipated volumes and policies.
- Consider whether any changes will be made related to gross-up methodology.
- Audit and revise any policies or program documents that reference taxability, rates, gross-ups and tax assistance. Many "Core-Flex" policies had been based on the fact that the core elements included were those that were non-taxed, so this may cause reconsideration of how your "Core-Flex" policy is structured.
- Revise both U.S. domestic and international assignment cost projections that touch the U.S. that are in the pipeline to revise for the increased tax costs.
- Identify and consider offering tax counseling to any U.S. inbound or outbound employees to educate them on the changes and impact on their tax situation.
- Educate stakeholders within your organization about the change and impending consequences.
- Be prepared to reconcile tax gross-ups done in the first few months of the year so that once payroll systems have been adjusted, all is aligned with the changes and requirements for 2018.
We are looking forward to collaborating with our clients and tax partners to effectively transition their programs into 2018 compliance.
Lastly, we would highly recommend registering for the Worldwide ERC webinar on January 9, 2018: The New Law: What You Need to Know about U.S. Tax Reform and Mobility.
Changes of interest include: The House bill included only four tax rates for individuals, while the Senate bill had seven. The Conference agreement includes seven rates (10%, 12%, 22%, 24%, 32%, 35%, and 37%). A major change is a drop in the top rate from 39.6% to 37%. In addition, a House provision that would have phased out the 12% rate for high income taxpayers was dropped. The Conference also changed the income levels at which a couple of the rates begin. The 22% rate now applies up to $165,000 (married joint) and $82,500 (single), up from $140,000 and $70,000, and the 24% rate now applies up to $315,000/$157,500, down from $320,000/$160,000. Finally, the top rate of 37% would apply at incomes of $600,000/$500,000, which is a drop from $1 million for married couples while the number for singles stays the same.