Employee Relocation: What Happens to Your Home?

Employees and small business owners often have questions about how to protect employees who are being relocated against financial loss on a “forced” sale of their home. Here are some answers.

Employees

There are two common ways to minimize the negative financial impact on relocating employees who have to sell their home, with varying tax consequences for the employee:

The employer reimburses the employee’s financial loss. Here, the employer has the home appraised and agrees to pay the employee the difference between the appraised fair market value and any lesser amount the employee gets on the sale. Such reimbursement would also cover the employee’s costs of the sale.

 

Financial loss, as described here, is not the same as a tax loss. The financial loss is the home’s value less what the employee collects under “forced sale” conditions. However, the value is not always clearly determined, and the relocating employee might think the home is worth more based on earlier appraisals or comparative sales. A tax loss is the property’s tax basis (cost plus capital investments) less what’s collected on the sale.

 

If the employee has a gain on the sale (the amount collected on the sale exceeds the basis), the gain can be tax-exempt up to $250,000 ($500,000 on certain sales by married couples) if certain criteria are met. However, tax loss on the sale of a personal residence is not deductible. (But if part of the home is rented out or used exclusively for the homeowner’s business, the loss attributable to that portion may be deductible, subject to various limitations.)

The employer’s reimbursement of the employee’s financial loss is taxable pay to the employee. Employers who want to shelter the employee from any tax burden on an employer-instigated relocation may “gross up” the reimbursement to cover the tax. But gross-up can be costly. For example, a grossed-up income tax reimbursement for a $10,000 loss would be $15,385 for an employee in the 35% bracket – more where Social Security and/or state taxes are also grossed-up.

Employer buys the home. Few employers directly buy and sell employees’ homes. But many do this indirectly, effectively becoming homeowners through relocation firms acting as the employers’ agents. Known as a Guaranteed Home Sale (formerly known as a Guaranteed Buy-Out or GBO), there is no tax on the employee when using either of these two options:

 

Option 1. The relocation firm, as the employer’s agent, buys the home for its appraised fair market value and later resells it. The firm collects a fee from the employer, covering sales costs and any financial loss to the firm on resale. The IRS now says that this fee is not taxable to the employee. Also, the employee’s gain on the sale to the relocation firm qualifies for the tax exemption under the limits described above ($250,000 or $500,000).

Option 2. The relocation firm offers to buy the home for its appraised value, but the employee can pursue a higher price through a broker they choose from a list provided by the relocation firm. If a higher offer is made, the relocation firm pays that price to the employee (whether or not the home is then sold to that bidder). Again, the employee is not taxed on the firm’s fee, and the gain is tax-exempt under the above limits.

Either option works for the employees, letting them realize full value on the sale of the home (with possibly greater value through Option 2) without an element of taxable pay.

 

But if the deal is structured so that the relocation firm facilitates a sale from the employee to a third-party buyer (rather than to the relocation firm), the employer’s payment of the relocation firm’s fee is taxable to the employee.

The Employer’s Side

Here are the tax consequences for employers:

Reimbursing the employee’s loss. This is fully deductible as a business expense, as would be any additional amount paid as a gross-up. But it may be more costly, before and after taxes, than buying the home for resale through a relocation firm.

 

Paying the relocation fee only, without buying the home, as in the “Caution” above, is also fully deductible, as would be any gross-up amount on that fee.

Buying the home. The change in the IRS rule was good news for employees, but it gave nothing to employers whose tax treatment wasn’t covered. The official IRS position is that employer costs (other than carrying costs such as mortgage interest, maintenance, and fees to a relocation management company) are deductible only as capital losses, which, for corporate employers, are deductible only against capital gains. Taxpayer advocates tend to argue that employer costs here are fully deductible ordinary costs of doing business.

Questions About Relocating?

If you’ve been offered a job that requires relocating to another state and are wondering how it might affect your tax situation, or if you are a business owner who would like to know more about the employer aspects of employee relocation, don’t hesitate to call. 

Avoiding a Tax Surprise When Retiring Overseas

Are you approaching retirement age and wondering where you can retire to make your retirement nest egg last longer? Retiring abroad may be the answer. But first, it’s important to look at the tax implications — because not all retirement country destinations are created equal.

Taxes on Worldwide Income

Leaving the United States does not exempt U.S. citizens from their U.S. tax obligations. While some retirees may not owe any U.S. income tax while living abroad, they must still file a return annually with the IRS – even if all of their assets were moved to a foreign country. The bottom line is that you may still be taxed on income regardless of where it is earned.

Unlike most countries, the United States taxes individuals based on citizenship, not residency. As a result, every U.S. citizen (and resident alien) must file a U.S. tax return reporting worldwide income (including income from foreign trusts and foreign bank and securities accounts) in any given taxable year that exceeds threshold limits for filing.

The filing requirement generally applies even if a taxpayer qualifies for tax benefits, such as the foreign earned income exclusion or the foreign tax credit, substantially reducing or eliminating U.S. tax liability.

These tax benefits are not automatic and are only available if an eligible taxpayer files a U.S. income tax return.

Any income received or deductible expenses paid in foreign currency must be reported on a U.S. return in U.S. dollars. Likewise, any tax payments must be made in U.S. dollars.

Also, retired taxpayers may have to file tax forms in the foreign country where they reside. They may, however, be able to take a tax credit or a deduction for income taxes you paid to a foreign country. These benefits can reduce taxes if both countries tax the same income.

Nonresident aliens who receive income from U.S. sources must determine whether they have a U.S. tax obligation. The filing deadline for nonresident aliens is generally April 15.

FBAR Reporting

U.S. persons who own a foreign bank account, brokerage account, mutual fund, unit trust, or another financial account are required to file a Report of Foreign Bank and Financial Accounts (FBAR) by April 15 if they have:

• Financial interest in, signature authority or other authority over one or more accounts in a foreign country, and
• The aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.

A foreign country does not include territories and possessions of the United States, such as Puerto Rico, Guam, the U. S. Virgin Islands, American Samoa, or the Northern Mariana Islands.

Income From Social Security or Pensions

If Social Security is your only income, your benefits may not be taxable, and you may not need to file a federal income tax return. If you receive Social Security, you should receive a Form SSA-1099, Social Security Benefit Statement, showing the amount of your benefits. Likewise, you should receive a Form 1099-R for each distribution plan if you have pension or annuity income.

Retirement income is generally not taxed by other countries. As a U.S. citizen retiring abroad who receives Social Security, for instance, you may owe U.S. taxes on that income but may not be liable for tax in the country where you’re spending your retirement years.

However, if you receive income from other sources (either U.S. or country of retirement), from a part-time job or self-employment, for example, you may have to pay U.S. taxes on some of your benefits. Each country is different, and you may also be required to report and pay taxes on any income earned in the country where you retired.

Foreign Earned Income Exclusion

If you’ve retired overseas but take on a full or part-time job or earn income from self-employment, the IRS allows qualifying individuals to exclude all, or part, of their incomes from U.S. income tax by using the Foreign Earned Income Exclusion (FEIE). In 2023, this amount is $120,000 per person. If two individuals are married and work abroad and meet either the bona fide residence test or the physical presence test, each one can choose the foreign-earned income exclusion. Together, they can exclude as much as $240,000 for the 2023 tax year.

Income earned overseas is exempt from taxation only if certain criteria are met, such as residing outside of the country for at least 330 days over 12 months or an entire calendar year.

Tax Treaties

The United States has income tax treaties with many foreign countries, but these treaties generally don’t exempt residents from their obligation to file a U.S. tax return. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate or are exempt from U.S. income taxes on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income.

Treaty provisions are generally reciprocal and apply to both treaty countries. Therefore, a U.S. citizen or resident who receives income from a treaty country and is subject to taxes imposed by foreign countries may be entitled to certain credits, deductions, exemptions, and reductions in the rate of taxes of those foreign countries.

State Taxes

Many states also tax resident income, so even if you retire abroad, you may still owe state taxes unless you established residency in a no-tax state before you moved overseas. Some states honor the provisions of U.S. tax treaties; however, some states do not. Therefore, it is prudent to consult a tax professional for advice.

Relinquishing U.S. Citizenship

Taxpayers who relinquish their U.S. citizenship or cease to be lawful permanent residents of the United States during any tax year must file a dual-status alien return and attach Form 8854, Initial and Annual Expatriation Statement. A copy of Form 8854 must also be filed with the Internal Revenue Service by the tax return’s due date (including extensions).

Giving up your U.S. citizenship doesn’t mean giving up your right to receive Social Security, pensions, annuities, or other retirement income. However, the U.S. Internal Revenue Code (IRC) requires the Social Security Administration (SSA) to withhold nonresident alien tax from certain Social Security monthly benefits. Unless you qualify for a tax treaty benefit, as a nonresident alien receiving Social Security retirement income, SSA will withhold a 30 percent flat tax from 85 percent of those benefits. This results in a withholding of 25.5 percent of your monthly benefit amount.

Consult a Tax Professional Before You Retire

Don’t wait until you’re ready to retire to consult a tax professional. Call the office today and find out what your options are well in advance of your planned retirement date. 

Saving for Education: Understanding 529 Plans

Many parents are looking for ways to save for their child’s education, and a 529 Plan is an excellent way to do so. Even better is that, thanks to the passage of tax reform legislation in 2017, 529 plans are now available to parents wishing to save for their child’s K-12 education as well as college (two and four-year programs) or vocational school.

 

The SECURE Act of 2019 expanded the 529 Plan to include fees, books, supplies, and equipment for apprenticeship programs and repayment of principal and interest on student loan debt for the designated beneficiary or the beneficiary’s sibling, up to a lifetime limit of $10,000.

You may open a Section 529 plan in any state, and there are no income restrictions for the individual opening the account. Contributions, however, must be in cash, and the total amount must not be more than is reasonably needed for higher education (as determined initially by the state). A minimum investment may be required to open the account, such as $25 or $50.

Each 529 Plan has a designated beneficiary (the future student) and an account owner. The account owner may be a parent or another person and typically is the principal contributor to the plan. The account owner is also entitled to choose (and change) the designated beneficiary.

Neither the account owner nor beneficiary may direct investments. Still, the state may allow the owner to select a type of investment fund (e.g., fixed-income securities) and change the investment annually as well as when the beneficiary is changed. The account owner decides who gets the funds (can pick and change the beneficiary) and is legally allowed to withdraw funds at any time, subject to tax and penalties (more about this topic below).

Unlike other tax breaks for higher education funding, such as the American Opportunity and Lifetime Learning Tax Credits, 529 plans aren’t limited to funding only tuition. Room, board, lab fees, books, and supplies can be purchased with funds from your 529 Savings Account. However, individual state programs could have a more narrow definition, so check with your particular state.

Tax-Free Distributions

Distributions from 529 plans are tax-free as long as they are used to pay qualified higher-education expenses for a designated beneficiary. Distributions are tax-free even if the student claims the American Opportunity Credit, Lifetime Learning Credit, or tax-free treatment for a Section 530 Coverdell Education Savings Account (ESA) distribution – provided the 529 plan distributions aren’t covering the same specific expenses.

Qualified expenses include tuition, required fees, books, supplies, equipment, and special needs services. Room and board also qualify for someone who is at least a half-time student. Also, starting in 2018, qualified expenses include up to $10,000 in annual expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school.

 

Qualified expenses also include computers and related equipment used by a student while enrolled at an eligible educational institution; however, software designed for sports, games, or hobbies does not qualify unless it is predominantly educational in nature.

 

Federal Tax Rules

Income Tax. Contributions made by the account owner or other contributor are not deductible for federal income tax purposes, but many states offer deductions or credits. Earnings on contributions grow tax-free while in the plan. Distributions for a purpose other than qualified education are taxed to the one receiving the distribution. In addition, the taxable portion of the distribution will incur a 10 percent penalty, comparable to the 10 percent penalty that applies to Coverdell ESAs. Also, the account owner may change the beneficiary designation from one to another in the same family. Funds in the account roll over tax-free for the benefit of the new beneficiary.

Gift Tax. For gift tax purposes, contributions are treated as completed gifts even though the account owner has the right to withdraw them – thus, they qualify for the up-to-$17,000 annual gift tax exclusion in 2023 ($16,000 in 2022). One contributing more than $17,000 may elect to treat the gift as made in equal installments over that year and the following four years so that up to $85,000 can be given tax-free in the first year.

Estate Tax. Funds in the account at the designated beneficiary’s death are included in the beneficiary’s estate – another odd result since those funds may not be available to pay the tax. Funds in the account at the account owner’s death are not included in the owner’s estate, except for a portion where the gift tax exclusion installment election is made for gifts over $17,000 ($16,000 in 2022). Here is an example: If the account owner made the election for a gift of $85,000 ($80,000 in 2022), a part of that gift is included in the estate if the owner dies within five years.

A Section 529 plan can be an especially attractive estate-planning move for grandparents. There are no income limits for contributing, and the account owner giving up to $85,000 ($80,000 in 2022) avoids gift tax and estate tax by living five years after the gift, yet has the power to change the beneficiary.

State Tax. State tax rules are all over the map. Some reflect the federal rules, and some are quite different. For an overview of each state’s 529 plan, see: College Savings Plans Network (CSPN).

Looking Ahead

Starting in 2024, 529 college savings plans maintained for at least 15 years can be rolled over to a Roth IRA. Any contributions (and earnings on those contributions) to the 529 plan made within the last five years are not eligible. The rollover must be trustee to trustee, with a lifetime limit of $35,000 per account beneficiary. Rollovers are subject to Roth IRA annual contribution limits.

Seek Professional Guidance

Considering the differences among state plans, the complexity of federal and state tax laws, and the dollar amounts at stake, please call the office and speak to a tax and accounting professional before opening a 529 plan. As always, don’t hesitate to contact the office if you have questions about this or any other tax topics affecting your tax

Check the Status of a Tax Refund Using This IRS Tool

Taxpayers can check the status of a tax refund 24 hours after e-filing their 2022 federal income tax return. The easiest and most convenient way to do this is by using the “Where’s My Refund?” tool on the IRS website. The tool provides a personalized refund date after the return is processed and a refund is approved.

There are two ways to access the “Where’s My Refund?” tool – visiting IRS.gov or downloading the IRS2Go app. To use the tool, taxpayers will need the following information:

• Their Social Security number or Individual Taxpayer Identification Number
• Tax filing status
• The exact amount of the refund claimed on their tax return

The tool displays progress in three phases: when the return was received, when the refund was approved, and when the refund was sent. When the status changes to approved, it means that the IRS is preparing to send the refund as a direct deposit to the taxpayer’s bank account or directly to the taxpayer in the mail, by check, to the address used on their tax return.

The IRS updates the “Where’s My Refund?” tool once a day, usually overnight, so taxpayers don’t need to check the status more often than that. Calling the IRS won’t speed up a tax refund. The information available on “Where’s My Refund?” is the same information available to IRS telephone assistors.

Taxpayers should remember to allow time for their financial institution to post the refund to their account or for the refund to be delivered by mail. As always, please contact the office with any questions about tax refunds, tax returns, or other tax matters.