2018 Tax Cuts and Jobs Act
On December 20, 2017, Congress sent a compromise tax overhaul bill to President Trump for signature. Primarily along party lines, the House of Representatives voted 224-201, and the Senate 51-49, to approve the 2018 Tax Cuts and Jobs Act. Altair’s immediate focus is to analyze how the changes will impact our clients and formulate strategies on how to best prepare for the new landscape.
As previously noted in our last Altair Advisor, Tax Reform – A Modern Day Drama, the bill reduces corporate and individual tax rates (both in the number of brackets and marginal tax rates), nearly doubles the standard deduction to $12,000 for individuals and $24,000 for joint filers (the personal exemption is eliminated), and leaves the deduction for charitable giving unchanged. The child tax credit will double to $2,000 for each child under 17, and the “phase out” (the point at which the credit is extinguished) for married couples increases to $400,000 in adjusted gross income. Additionally, the Patient Protection and Affordable Healthcare Act mandate requiring individuals to have health insurance is effectively repealed by reducing the penalty to $0.
SPECIFIC TO THE MOBILITY INDUSTRY
For global mobility professionals, the single key provision of the Tax Cut and Jobs Act is elimination of the moving expense deduction. Beginning in 2018, taxpayers will no longer be able to exclude from income payments made by an employer for moving-related expenses or deduct expenses incurred by the taxpayer. Currently, under §119(a) of the Internal Revenue Code, taxpayers moving more than 50 miles may deduct or exclude employer-paid expenses for moving a taxpayer’s household goods, up to thirty days’ storage- in-transit, and certain final move expenses. Requirements for moving expense deductions (i.e., 50-mile distance rule, 1-year to relocate rule, and 39-week employment requirement) are no longer applicable as all payments by an employer for moving-related expenses will now be included in the employee’s income (with concurrent withholding rules) and subject to each company’s position on tax gross-up assistance. Taxpayers driving to the new location will no longer be able to deduct their mileage.
Although the National Association of REALTORS® and the American Moving and Storage Association lobbied for continuation of the moving expense deductions, there simply wasn’t sufficient support. Moreover, under Congressional pay as you go rules (“PayGo”), Congress is required to either reduce other entitlement spending or increase revenue to offset anticipated revenue loss. While Congress may waive PayGo, it takes the consent of no fewer than 60 Senators, and in a Congress plagued by contention, it is unlikely this consensus will be reached.
Also of note to the mobility professional is the $10,000 limitation for state and local tax deductions on the taxpayer’s federal return. This will be of particular concern to employees moving to either coast as it may actually increase their tax burden depending on the departure location. For instance, an employee moving from Texas, which has no state income tax, to California may find themselves paying up to 13.3% more in taxes, where the deduction is capped $10,000. Mortgage interest remains deductible but only on acquisition indebtedness up to $750,000 (reduced from $1 million), and interest on home equity indebtedness will no longer be deductible (currently, interest on loans up to $100,000 is deductible). Notably, though, the determination of what is “acquisition indebtedness” – which remains deductible in 2018 and beyond – is based not on how the loan is structured or what the bank (or mortgage servicer) calls it, but how the mortgage proceeds were actually used. To the extent they were used to acquire, build, or substantially improve the primary residence that secures the loan, it is acquisition indebtedness – even in the form of a HELOC or home equity loan. Unfortunately, the existing Form 1098 reporting does not even track how much is acquisition indebtedness versus not – despite the fact that only acquisition mortgage debt is now deductible. Nonetheless, taxpayers are still responsible for determining how much is (and isn’t) deductible for tax purposes. Which means actually tracking (and keeping records of) how mortgage proceeds are/were used when the borrowing occurred, and how the remaining principal has been amortized with principal payments over time! Other deductions that remain untouched include medical expenses, casualty losses (but only if the President declares a state of emergency) and interest on student loan debt.
Altair recommends to mobility managers that while navigating the financial impact of tax reform, keep an eye on the big picture, which includes a significant reduction in corporate tax rates. For most organizations, the overall tax savings should help offset the additional tax costs caused by the loss of the moving expense deduction.
SUMMARY AND NEXT STEPS
The most significant impacts for many U.S. domestic mobility programs include:
- Elimination of the moving expense deduction for household goods and final move expenses. This will have a significant impact on program costs should employers begin providing tax assistance for these benefits beginning in 2018; alternatively, the financial impact to transferees will be significant if employers choose not to provide tax assistance.
- Removal of the IRS-mandated time and distance tests beginning in 2018. Companies will need to determine if they will retain any portion of the current tests as part of their individual program requirements or remove them entirely.
- Mortgage interest deductions allowable only to a maximum loan amount of $750,000 will require consideration around providing gross up for any financial loss.
- State and local tax deduction cap of $10,000 for any combination of taxes may impact transferees who move from low to high cost states. This will likely have an effect on cost of living comparisons.
- Review of payback agreements is recommended to ensure handling of payroll reporting and taxation of relocation reimbursements is clearly detailed.
- Confirm accruals for any incurred but unpaid and unreported 2017 expenses that were previously considered excludable are identified as such to retain the excludable treatment.
The impact to international mobility programs should also be considered:
- Hypothetical tax recalculation should be adjusted to as early in 2018 as possible to ensure the reset evaluates the employee’s personal tax responsibilities under the new tax laws.
- Confirm the hypothetical tax reset includes detailed calculation information to ensure assignees fully understand the “why” behind the change.
- Early communication of the potential impacts to assignees who are U.S. citizens or green card holders who may be permanent transfers outside of the U.S. and responsible for tax on their worldwide income. Employers should consider offering a tax briefing to avoid a tax hardship created due to lack of visibility.
- Organizations with employees on assignment where the company is not fully tax equalizing the move should also consider offering a tax briefing.
- Assignments in pre-departure status will likely need to be reviewed and cost estimates revised to ensure there is full visibility to the added cost.
- As recommended above in the domestic considerations, accrual for 2017 expenses to retain the excludable treatment of incurred but unpaid benefits is recommended.
Your Altair Global Client Services representative will be reaching out immediately following the holiday to review the decisions your organization will need to make given the 2018 Tax Cuts and Jobs Act impact to your relocation program.
Altair Global (‘Altair’) has provided this information as a service and convenience for your information only. It is not intended to replace your own legal or financial guidance and/or assistance and you are encouraged to seek the advice of your own tax and legal advisor. Further, the information contained herein is to our knowledge accurate to the extent of the data available to Altair as of the date identified. Altair does not assume responsibility for the accuracy of the contents hereof and is under no obligation to update the material contained herein.