If you've been reassigned by your current employer to an office in another part of the country -- or if you're obtaining new employment that requires you to move residences -- you may be debating the pros and cons of such a move. Often, employers can tilt the balance in their favor by offering relocation assistance or a signing bonus in exchange for a quick start date. Because the acceptance of this type of arrangement can have tax consequences, there are a number of factors you'll want to take into consideration before making your final decision. Read on to learn more about what you'll need to ask before accepting a relocation package or signing bonus.
What expenses will be reimbursed?
In many cases, your employer will offer to reimburse the expenses you incur during the moving process. The amount of such assistance can be capped at a certain figure, or may simply be based on all reasonable costs you submit for reimbursement. In other cases, your employer may simply offer you a signing bonus or flat amount of cash that can be used in part to cover your moving costs.
Although you may be interested in only the bottom line, it's important to determine precisely what type of arrangement your employer is offering rather than simply agreeing to a specific dollar amount. In some cases, you may owe no income tax on the funds provided by your employer, while in other situations you may be taxed at your highest marginal rate.
- If you're required to document and submit expenses for reimbursement:
If your employer won't reimburse you until you've documented your expenses, it's likely that this is a "qualified plan" under IRS rules. This means that any costs that would be deductible from your federal income taxes if you paid them yourself are not taxable to you as income if paid by your employer. However, you may still be responsible for taxes on non-deductible costs, like down payment assistance or meals eaten on the road.
- If you're not required to document expenses up to a certain dollar amount
If you're required to document expenses and seek reimbursement only after your expenses exceed a certain dollar amount, your tax situation can become more complicated. In general, you'll be taxed on any funds received from your employer that weren't used for qualified, deductible moving expenses. Documenting these funds to ensure that you're treating them correctly for tax purposes can be a complex task, so you'll want to consult a certified public accountant (CPA) to prepare your taxes for the year of your move.
- If you're given a flat cash amount or signing bonus
If you're given money for the express purpose of relocating your home, but are not required to provide any documentation of how the funds were spent, you'll be unable to deduct your moving expenses yourself and will also be taxed on any funds that weren't used for deductible moving expenses.
If this compensation is instead framed as a signing bonus (rather than relocation assistance), it will be treated like other bonuses and taxed at your highest marginal rate. However, you'll then be able to deduct the costs you spent while moving, as the funds received from your employer were not intended to pay for your move.
Can you choose between relocation assistance and a higher starting salary?
In some situations (particularly if your relocation assistance or signing bonus will be taxed at your highest marginal rate) you may be better served by negotiating a slightly higher starting salary rather than seeking relocation assistance. A higher starting salary can be used as a base for incremental raises in the future -- and the higher your beginning salary, the more your periodic adjustments will add up. A higher salary will also help you minimize your taxes by spreading out this income over a longer period of time.
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