Certain moving expenses incurred in 2017 not subject to withholding and employment tax in 2018

By Kenneth Hausser, CPP, Iselin, N.J.; Debera Salam, CPP, Houston; and Debbie Spyker, CPA, Washington

Editor: Michael Dell, CPA

In IR-2018-190 and Notice 2018-75, the IRS announced that employer reimbursements made in 2018 of qualified moving expenses incurred prior to 2018 in connection with a move that occurred prior to Jan. 1, 2018, may be excluded from employees' wages and gross income despite the suspension of the exclusion for tax years 2018 through 2025 by the legislation known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97. Such reimbursements are also excluded from wages subject to employment taxes, including Federal Insurance Contributions Act (FICA) taxes and Federal Unemployment Tax Act (FUTA) taxes. This rule also applies to payments made to a third party in 2018 for moving services provided prior to 2018.

All other requirements of the exclusion under Sec. 132(g) must be met, including that the qualified moving expenses must have been deductible under Sec. 217 if the employee had paid or incurred them directly, but the employee did not actually deduct them.

Background

Under the TCJA, reimbursements for moving expenses made to employees or paid directly to third parties on and after Jan. 1, 2018, through Dec. 31, 2025, are included in wages subject to federal income tax, federal income tax withholding, FICA, and FUTA. An exception to this provision applies to members of the armed forces on active duty moving pursuant to a military order and incident to a permanent change of station (TCJA, §11048; Sec. 132(g)(2)).

Prior to Jan. 1, 2018, Sec. 132(g) allowed an exclusion from wages for federal income tax, federal income tax withholding, FICA, and FUTA purposes under Sec. 132(a)(6) for qualified moving expenses reimbursed or paid directly by the employer to the extent those moving expenses were deductible under Sec. 217. Under Sec. 217 and Regs. Sec. 1.217-2(b)(3), the deduction applied to the cost of moving household goods and personal effects from the former residence to the new residence, storage expenses incurred within any consecutive 30-day period after the day the goods and effects were moved from the taxpayer's former residence and prior to delivery at the taxpayer's new residence, and lodging and mileage expenses incurred during the period of travel from the former residence to the new place of residence. Special rules applied to foreign moves. Nontaxable moving expense reimbursements paid directly to employees were reported on Form W-2, Wage and Tax Statement, in box 12, by code P (seeIRS Publication 521, Moving Expenses, and Form 3903, Moving Expenses).

Correcting amounts included in wages in 2018

If employers have included moving expense reimbursements or third-party payments in taxable wages in 2018 for qualified moving expenses incurred before 2018, the IRS states that the normal adjustment procedures apply. Accordingly, if employers acted before Dec. 31, 2018, they will be able to refund to employees any federal income or FICA tax withheld on those amounts. Employers claim a refund of federal income tax and FICA withheld and employer matching FICA contributions by filing Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, for the quarter in which the moving expense reimbursements or third-party payments were originally reported. A credit to FUTA may also apply and can be taken into account when making the final FUTA deposit for the 2018 fourth quarter.

Implications

Previously, it had been unclear whether the changes under the TCJA would apply to moving expenses incurred in 2017 but reimbursed or paid to a third party in 2018. Accordingly, the conservative approach, absent IRS guidance, was to include all reimbursements and payments for moving expenses in taxable wages effective Jan. 1, 2018, regardless of when those expenses were incurred.

Notice 2018-75 gives employers the assurance they need to exclude 2018 relocation reimbursements and third-party payments from taxable wages if the moving expenses were incurred prior to Jan. 1, 2018.

Keep in mind that not all states conform to the federal rules for moving expenses. Accordingly, employers will need to confirm the treatment of moving-expense reimbursements and third-party payments for state income and unemployment insurance tax purposes.

EditorNotes

Michael Dell is a partner at Ernst & Young LLP in Washington.

For additional information about these items, contact Mr. Dell at 202-327-8788 or michael.dell@ey.com.

Unless otherwise noted, contributors are members of or associated with Ernst & Young LLP. Ernst & Young previously published versions of these items as Tax Alerts.

Newsletter Articles

TAX REFORM

Traps for the unwary: Tax Cuts and Jobs Act changes

By now many of us are familiar with the various provisions of the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97. Here is a list of changes together with (perhaps) unexpected nuances.

DEDUCTIONS

Qualified business income deduction regs. and other guidance issued

The package includes final regulations, guidance on how to calculate W-2 wages, a safe-harbor rule for rental real estate businesses, and new proposed rules on the treatment of previously suspended losses.