The Tax Cuts and Jobs Act, passed in December 2017, eliminated a number of popular taxpayer deductions. One of them is the moving expense allowance that was placed on hiatus for tax years 2018 through 2025. It will come back in 2026 unless Congress intervenes to eliminate it permanently.
This change does not affect military personnel, but it does apply to DOD Civilians and contractors.
In addition, moving benefits doled out in 2018 will be taxable to the employee regardless of whether the government reimbursed the individual for out-of-pocket expenses or paid the moving company directly. Civilian employees and contractors must now include the amount of PCS moving benefits in their income. This can create a substantial increase in taxable wages. The average cost of a job transition move is estimated to be over $13,000.
The following reimbursements, whether by direct or indirect payment, are now taxable to the relocating U.S. Government employee:
1. Lodging expenses for en-route travel to the new duty station.
2. Mileage per diem for POV travel to the new duty station.
3. Transportation using common carriers (such as airlines) to the new duty station.
4. Shipment of household goods, to include unaccompanied air baggage and professional books, paper and equipment.
5. Temporary storage of HHG in transit, as long as the expenses are incurred within 30 calendar days after the day the items are removed from the old residence and before they are delivered to the new residence.
6. Shipment of a mobile home in lieu of HHG.
7. Extended storage of HHG for outside the continental U.S. assignments.
8. Shipment of POVs within or outside of the country.
Temporary Quarters Subsistence Expense is an optional taxable allowance intended to reimburse employees for some costs of lodging, food and other necessities when occupying temporary quarters at the old or new duty station for a CONUS to CONUS move. Temporary Quarters Subsistence Allowance is a non-taxable supplement for employees traveling to or from an overseas duty location on official travel orders and authorized Living Quarters Allowance. The taxability of TQSE is not changed by the new tax law.
Relocation expense and TQSE reimbursements are subject to 22 percent IRS income tax withholding by DFAS on behalf of the employee. The reimbursements also are subject to Federal Insurance Contributions Act and Social Security withholdings of less than 6.2 percent for the employee and employer. Income tax withholdings and FICA contributions made by DFAS on behalf of employees will be withheld from the travel settlement payment amount (if possible) or billed as a debt.
For some, the additional tax burden may be offset by the Relocation Income Tax Allowance. This entitlement reimburses DOD Civilian employees for most federal, state and local income taxes incurred as a result of receiving taxable relocation benefits. Unfortunately, RITA itself also is considered taxable income and there is no additional benefit or offset to reimburse civilians for that tax burden.
RITA is not automatic. The employee must apply for it in the year after receiving taxable travel pay. Employees who receive a Withholding Tax Allowance entitlement – detailed below – with the travel settlement must submit a RITA claim by April 30 of the following calendar year. Consulting a financial expert familiar with travel allowances is advisable for the claims because of the multiple timelines and requirements that must be met to qualify. Also keep in mind that RITA is not available to new and retiring employees, although legislation to extend it is pending. RITA information and forms can be found at the DFAS website: www.dfas.mil/civilianemployees/civrelo/relocationincometax.html.
The Withholding Tax Allowance is an advance against RITA claimed by the employee on settlement voucher DD Form 1351-2 following the completion of travel. WTA is an election, and can be declined by the employee. Payments are taxable in the year received, and are deducted from the RITA settlement computed in the following year. If WTA is elected by the employee, he or she must file a RITA claim within 120 days (April 30) of the following calendar year. Failure to file a timely RITA claim will result in a DFAS debt and collection of the entire amount of WTA paid on the employee's behalf.
Employees should review marginal tax rates to determine whether the 22 percent WTA payment will exceed the final RITA payment (resulting in a debt to DFAS). Employees with a marginal tax rate below 22 percent may be subject to repayment of WTA amounts. Marginal tax rates can be found online at www.bankrate.com/finance/taxes/tax-brackets.aspx. WTA information and forms can be found at the DFAS website: www.dfas.mil/civilianemployees/civrelo/withholdingtaxallowance.html.
Employees can reduce the costs of a move by reducing the weight of or avoiding the HHG, unaccompanied baggage or POV shipments. A do-it-yourself move may provide options to control or mitigate move expenses.
The new law concerns the taxability of reimbursements for previously deductible moving expenses, and does not appear to affect direct or indirect reimbursements for student travel, renewal agreement travel, or early return of dependent travel.