Pre-2018 employee moving expenses are reimbursable in 2018, tax free
TAX ALERT |
In Notice 2018-75 (Sept. 21, 2018), the IRS clarified that employer reimbursements paid after Jan. 1, 2018 for qualified employee moving expenses incurred prior to that date can be excluded from employee wages for income and employment tax purposes.
Prior to the passage of the Tax Cuts and Jobs Act (TCJA), P.L. 115-97 (Dec. 22, 2017), under section 217 individuals could take a tax deduction for certain “qualified moving expenses” incurred for a qualifying move to a new principal workplace.
Under section 132(a) and (g), an employer could pay for or reimburse an employee’s qualified moving expenses for a work-related move meeting the section 217 requirements, and could exclude the qualified moving expense payments from the employee’s taxable compensation. The amounts reimbursed or paid were also not subject to FICA/Medicare tax or federal income tax withholding. If the employer paid for or reimbursed the employee for these moving expenses, the employee was not allowed a tax deduction for the same amounts.
Section 11048 and 11049 of the TCJA added new paragraphs 217(k) and 132(g)(2), which suspend employee tax deductions for moving expenses and the employer exclusion from employee wages for moving expense reimbursements. The suspensions apply to taxable years “beginning after December 31, 2017 and before January 1, 2026.”
Questions arose regarding whether the language of section 132(g)(2) prevented employers from excluding amounts paid in 2018 as reimbursement for pre-2018 qualified moving expenses from employee income.
Notice 2018-75 answers that these amounts are excludable (and are not subject to employment tax), so long as (a) the move occurred on or before Dec. 31, 2017, (b) the employee did not already deduct the moving expenses, and (c) the requirements for the pre-TCJA deduction would have been met. The exclusion is not available for reimbursements for moves which occurred after Dec. 31, 2017.
To the extent employers have already treated reimbursements paid in 2018 for pre-2018 moving expenses as wages, and paid employment tax on the amounts, the IRS instructs that the adjustment and refund processes under sections 6413 and 6402, respectively, are available to correct the overpayment.