Most of the time, figuring the timing of income and expenses is fairly straightforward: Income is income when received, expenses are expenses when paid. When income and expenses straddle tax years, things can get muddled. And when income and expenses straddle tax years when big changes are happening, it’s even more confusing. Taxpayers got a bit of a break this week when the Internal Revenue Service (IRS) offered guidance for taxpayers who moved in 2017, but expenses weren’t reimbursed or paid until 2018.
Before the 2017 Tax Cuts and Jobs Act (TCJA), certain moving expenses were either excluded from income (so, a tax-free perk) or treated as an above-the-line deduction. With an above-the-line deduction, you can claim some tax breaks even if you don’t itemize your deductions; sometimes called adjustments to income, they are found on page 1 of your form 1040.
For the 2017 tax year, they included moving expenses. However, in 2018, moving expenses were excluded both as a tax-free perk from employers and as an above-the-line deduction.
(Exceptions exist for active-duty members of the U.S. Armed Forces whose moves relate to a military-ordered permanent change of station.)
That presented a dilemma for some employers and taxpayers: What if the moving expenses occurred in 2017 but weren’t paid or reimbursed by the employer until 2018. Would you lose the tax break that you would have been entitled to if the employer moved a little faster?
Typically, you’d be quick to cry foul on the employer. Keep in mind, however, that the TCJA wasn’t signed into law until December 22, 2017 – just days before the holidays and year-end. Many companies had already run payroll and expenses and were looking forward to sipping eggnog, not delving through pages of new tax laws.
To resolve the issue, the IRS has issued Notice 2018-75 (downloads as a PDF). In the Notice, the IRS makes clear that the exclusion from income applies for moving expenses paid or incurred in 2017 and payments or reimbursements received in 2018. In other words, employer payments or reimbursements in 2018 for employees’ moving expenses in 2017 are excluded from the employee’s wages and are not subject to federal income or employment taxes. The IRS also clarified that the same result follows if the employer pays a moving company in 2018 for moving services provided to an employee in 2017.
Of course, the regular rules apply. The most important? The expenses must be work-related moving expenses that would have been deductible by the employee if the employee had directly paid them in 2017. And no double-dipping: The employee must not have deducted them in 2017.
(You can read more about the old rules governing moving expenses here.)
But, since it’s September of 2018 and we’re just now receiving this guidance, there’s a chance that some employers might have already treated reimbursements or payments as taxable. No worries: Almost all tax-related snafus can be fixed, and this is no exception. Employers should follow the normal employment tax adjustment and refund procedures.
It feels like TCJA guidance is coming fast and furious now, which is great since there are just a few more months in the tax year. Keep watching this space for more.
