IRS Says Reimbursement of 2017 Moving Expenses Are Tax-Free In 2018

Author: Rena Pirsos, XpertHR Legal Editor

September 25, 2018

The IRS has announced in Notice 2018-75 that, for federal income tax (FIT) and employment tax (i.e., Social Security and Medicare (FICA), and federal unemployment taxes (FUTA)) purposes, an employer should not include in an employee's taxable wages any reimbursements the employer makes in 2018 for moving expenses the employee incurred before 2018. The same rule applies if the employer pays a third-party moving company in 2018 for qualified moving services provided to an employee before 2018.

Reimbursements or payments are qualified under the Internal Revenue Code if they are for work-related moving expenses that would have been deductible by the employee (on his or her personal federal income tax return) if he or she had directly paid for them him/herself prior to January 1, 2018. The employee must not have deducted them in 2017, however.

The 2017 tax reform law suspended the income exclusion for moving expenses reimbursed or paid by an employer on and after January 1, 2018, through December 31, 2025, making these amounts taxable, except for such reimbursements made to active-duty members of the U.S. Armed Forces whose moves relate to a military-ordered permanent change of station. This change left employers unsure of whether the income exclusion would apply to expenses incurred in 2017 but not reimbursed or paid until 2018.

Before January 1, 2018, the income exclusion applied to the reasonable cost of:

• Packing and moving of household goods and personal items to the new residence;
• Storage of household and personal items during the 30-day period after the items were moved from the old residence and before being delivered to the new residence, and;
• Lodging and mileage/transportation expenses incurred during the move.

In addition, employers reported tax-free moving expense reimbursements paid directly to employees on Form W-2, Wage and Tax Statement (in Box 12 using code P).

The IRS advises employers that have already treated prior-year reimbursements or payments as taxable in 2018 to follow standard employment tax adjustment and refund procedures by December 31, 2018. In particular, an employer may use Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, to claim a refund of the withheld FIT and FICA for the quarter in which the reimbursements or payments were reported. An employer may also be entitled to a FUTA tax credit when making its fourth quarter 2018 deposit.

Employers are cautioned to check the laws of the states in which they pay employees to verify state tax treatment of moving expense reimbursements and payments as some states do not conform to the federal rules.