How to Qualify for a Home
Tax Deductions For Relocation Lump Sum Payment
How to Manage a Lump Sum Move
Does your employee relocation package include a lump sum for moving expenses? If so, it’s important to know how to get the most out of your lump sum package so that you, and your employer, have a positive relocation experience.
Employee Relocation Package and Taxes*
Lump Sum payments to individuals for relocation expenses, including moving, are fully taxable as earnings. While some employees receive some tax assistance, or “grossed up,” lump sum packages in order to take home the full amount recommended for moving, others do not. Understandably, this creates a dilemma for transferees because there is often not enough money after taxes are deducted (about 40-45 percent) to pay for all of the things that the relocation package intended to cover.
Payments made directly by your employer for household goods moving services to the moving company, however, are excludable and do not need to be reported on your Form W-2 or IRS Form 3903. Therefore, if your company arranges a direct billing agreement with a provider for household goods moving, 30 days or less of storage, automobile transportation, etc. it will save both of you a taxation headache (in terms of timing and deductions). Direct billing arrangements also have other potential advantages, including replacement coverage for damaged or lost items at no cost to you, as well as moving priority.
If your company would prefer to avoid a direct billing arrangement for the whole employee relocation package, you can ask them to include just your moving expenses on an expense report which you will submit for reimbursement. This will prevent you from being taxed on these exempt items. You will still list your moving expenses on IRS Form 3903 and they will show up in Box 12P of your Form W-2, but they will not be considered income. In this case, your moving expenses are being paid outside of the lump sum, so your actual lump sum payment will be less, which is a benefit to you because it’s still being taxed as income. The remaining funds in your lump sum payment can be spent on other relocation items that your company intended to cover including a home finding trip, temporary living, and other relocation incidentals such as a new driver’s license, baby-sitters, cable setup, utilities and more.
If a direct billing agreement, or an expense agreement, is not arranged, you will be taxed on moving expenses upfront (as part of the 40-45 percent lump sum tax) and will have to wait until year end to claim your tax refund. You can claim the refund by filing IRS Form 3903 with your tax return to receive credit for taxes withheld in connection with the household goods moving portion of the lump sum payment.
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