In a news release on April 2, 2018, the U.S. IRS identified a
number of types of taxpayers whose withholding may be incorrect due to the
changes made by the Tax Cuts and Jobs Act of 2017, and strongly suggested that
taxpayers promptly review their withholding using the Withholding Calculator
available since February 28 on the IRS website.
Global mobility managers should review their withholding and gross up methodology, and they should also urge relocating employees to make use of the IRS withholding calculator to establish that their withholding, when taking account of the new tax law and their moving expenses, is neither too high nor too low. Doing so will reduce the number of unhappy employees at year end, and the number of gross-up complaints.
Because the tax reform law changes affect nearly every
taxpayer’s income and deductions, withholding based on old Forms W-4 may be
either too little, or too much. If
withholding is not adjusted early in the year, taxpayers who are underwithheld
will be in for a nasty surprise when returns are due next year, while taxpayers
who are overwithheld will have made an unnecessarily large interest-free loan
to the government.
While the new law will result is lower taxes for the
majority of taxpayers, some will see higher tax bills. According to a recent
analysis by the nonpartisan Tax Policy Center, some 65% of taxpayers will have tax
reductions. However, some 6% of
taxpayers will experience a tax increase, including 9-to-10% of taxpayers in the
middle to upper tax tiers. Those tiers
include many if not most transferees moving for their employer.
The IRS identified several groups of taxpayers who were the
most likely to have significant tax changes, either positive or negative. These include two-income families,
individuals who work two or more jobs or work only for part of the year,
individuals with children eligible for the child tax credit, individuals with
older dependents, individuals who itemized deductions on their 2017 returns,
individuals with high incomes or complex returns, and individuals who had large
refunds or tax bills for 2017.
Although the IRS list does not explicitly include employees
moving to a new job location, it is likely that many transferees will see
significant tax changes that are not reflected in current withholding or in
employer gross-ups for taxes due on moving costs. Transferees will have additional income from
newly taxable moving expense payments or reimbursements, and many if not most
will be itemizers who lose the benefit of a number of deductions. Consequently,
while their tax rate may be lower, their income may be considerably higher than
anticipated, and lead to higher tax liability. The reduction in the supplemental withholding rate from 25% to 22% also will
lead to some cases of gross-ups that are inadequate to cover the increased