Special Alert | New Tax Reform Plan May Impact Relocation Costs
As expected, the Republican Party has drafted tax reform bills in the House of Representatives and Senate that have the potential to significantly reform the current US tax code.
The two versions of the bill need to be reconciled prior to sending it to the President for his approval and signature. It is expected that the final version of the bill will be provided to the President by the end of December 2017.
As it is unknown what the final version of the bill will look like we have highlighted three key areas that could significantly increase the tax burden on individuals and companies:
- Tax free gains from the disposition of primary residences
- Repeal of moving expense deductions and exclusion of qualified moving expense reimbursements
- Mortgage interest deduction limitation
Tax Treatment of Gains from the Sale of a Principal Residence
Currently, the gains from a sale of a principal residence are excludable up to $500,000 for joint filers and $250,000 for individual filers if they have lived in the residence for two out of the preceding five years.
The House and Senate bills are very similar in that the gain will continue to be excludable, but the requirements will change to five out of the previous 8 years, and only available once every five years. Additionally, if the taxpayer’s adjusted gross income exceeds $500,000 for joint filers or $250,000 for individual filers the exclusion will be reduced dollar for dollar for the amount that exceeds the threshold.
The ultimate result of the change is that taxpayers will need to live in their principal residences longer to be eligible for the exclusion, and higher earning executives will see the exclusion phased out which could likely impact an individual’s decision to accept transfers and new assignments.
Repeal of Moving Expense Deductions and Exclusion of Qualified Moving Expense Reimbursements
Both the House and Senate bills repeal the moving expense deductions, and the House bill repeals the exclusion for qualified moving expense reimbursements (with an exception provided for military moves).
If taxable, the costs of moves/assignments will increase significantly as most companies will be responsible for the taxes relating to the gross-up of the moving expenses under their relocation policies.
Mortgage Interest Deduction Limitation
Currently an individual can deduct qualifying mortgage interest on mortgage debt up to $1,000,000, and an additional $100,000 for equity debt (for the primary residence and one additional home).
The House bill will limit qualifying interest on mortgage debt up to $500,000 and only for the primary residence, but will grandfather existing mortgages. The Senate bill will keep the $1,000,000 limit, but it will be limited to mortgages or refinances related to home improvements only.
The costs of assignments may increase depending upon the value of the home purchased and the provisions of the company’s relocation/equalization policy with the escalating property values in certain metropolitan areas of the United States (e.g., the Northeast United States, California, and Florida).
While it is difficult to say with certainty what the final version of the law will include, TheMIGroup is monitoring the situation closely, and will advise any clients with US-touching assignees of the impacts to year-end expense processing procedures and gross-up policies for the 2018 tax year, and going forward. Should you have any further questions, please reach your to your dedicated MI contact.