IRS provides guidance on Exclusion from Income of Qualified Moving Expense Reimbursements

On September 21, the Internal Revenue Service issued Notice 2018-75, providing guidance on excluding from income an employee’s reimbursed qualified moving expenses incurred in 2017 but paid after January 1, 2018. The recently enacted Tax Cuts and Jobs Act (TCJA), effective for any taxable year beginning after December 31, 2017 and before January 1, 2026, suspended the exclusion of reimbursed qualified moving expenses from an employee’s gross taxable income except in the case of an individual who is a member of the Armed Forces on active duty and moves pursuant to a military order as part of a permanent change of station. Notice 2018-75 excludes from an employee’s wages the amount of moving expenses incurred in 2017 but paid in 2018 that would otherwise have been taxable under the TCJA, based on a strict reading of the law.

A qualified moving expense reimbursement can be paid directly to the employee or to the provider of the moving services on the employee’s behalf during 2018, provided the expense had been incurred and would have been deductible as moving expenses prior to January 1, 2018. However, if the employee had previously deducted the moving expenses being reimbursed in a prior year, the reimbursement is taxable and does not qualify as a qualified moving expense reimbursement.

So what should an employer do if it’s already reimbursed an employee’s moving expenses in 2018 for a move that occurred in 2017, and included that amount as part of the individuals’ wages or other compensation? Those employers who have already withheld and paid federal employment taxes on the amount reimbursed to the relocating employee may be able to make an adjustment to reduce future payments to account for the potential overpayment or request a refund of the federal employment taxes.

For additional information regarding the overpayment process, see IRS Publication 15 (Circular E), or please contact us to discuss.