Relocation Benefit from Your Employer? Know How It Is Taxed!

September 19, 2013 | By: TaxCure Staff

relocation package tax detailsOne of the great things about hiring on with a new company that values its employees is that you are likely to get a relocation benefit to help you move. This can be a big help, since your company pays for you to move to accept a position. You don’t have to worry about saving up for these expenses, creating a little less stress as you get ready to uproot your family.

However, as with all things related to money, you should be aware of how you will be taxed on your relocation benefit. There are ways to reduce your taxes associated with relocation, and it makes sense to explore your options as you can.

Lump-Sum Relocation Benefit

While it’s exciting to be told that you will receive $10,000 to help you move, the reality is that a lump sum relocation payment is considered income. What you receive in this matter will be added to your annual income, and you will be taxed accordingly. Your relocation benefit might actually bump you into another tax bracket.

While you can reduce the tax bill with the help of tax-deductible moving expenses (which are above the line) if you qualify, the reality is that you are still being taxed on this benefit, and you need to be aware of it.

Employer Direct Billing

Instead of accepting a lump sum, you might be able to arrange for your moving expenses to be directly billed to your employer. This can be helpful since you won’t have some of the items considered income. The movement of household goods is not considered income, and you don’t have to worry that they will be reported on your W-2. Ask if your employer would allow the moving company to bill directly, rather than giving you a lump sum and requiring you to make the payments.

What About Expensing Your Moving Costs?

Another possibility is to expense your moving costs, rather than get involved in direct billing. You submit an expense report, asking for reimbursement. You won’t be taxed on the reimbursement related to exempt items. You will need to fill out Form 3903 (listing your moving expenses), and you will see your expenses reported on your W-2, but they will be in Box 12P, and not considered income.
You can expense the relevant moving costs, and the remainder of your relocation package can be paid via a lump sum. You’ll have a smaller amount of money upfront, but you will also have less to be taxed on.

Choosing Your Relocation Package

In some cases, you won’t have any say in how your relocation package is disbursed to you; you might have to simply accept what your new employer offers. But if you have a choice, carefully consider your options. Talk with the human resources department to find out how, exactly, your tax situation will be impacted, and what your options are. You can also contact a tax professional to help you figure out the best course of action for your situation.