The proposed coronavirus relief package defines the amounts to be given to taxpayers based on their adjusted gross income. This can be complicated for transferees who received moving expense payments.
A massive coronavirus economic relief package that is expected to be passed by Congress and signed into law by the end of the week includes one-time relief payments to every American with a Social Security number. However, limitations on who can qualify may, in some cases, affect recently relocated employees.
The relief payments are $1,200 per adult ($2,400 for married couples), plus $500 for every child under the age of 17. However, full payments are limited to individuals with adjusted gross income less than $75,000 and married couples with adjusted gross income less than $150,000. The payments then phase out to zero over income levels up to $99,000 and $198,000.
The program will be administered by the Internal Revenue Service. Income levels of all taxpayers will be determined based on 2019 adjusted gross income for those who have filed 2019 returns, and 2018 adjusted gross income for those who have not. For those who do not file returns, IRS will rely on Social Security records.
IRS will have to do a massive reprogramming of its systems to identify taxpayers eligible for payments and calculate the payment amounts. Payments will be sent directly to bank accounts if taxpayers have opted for direct deposit of refunds. Otherwise, payments will be mailed to the taxpayer’s last known address. This may affect some transferees for whom IRS has an old address. Although Congress has promised immediate relief, it is expected to take several weeks for IRS actually to begin payments (a time frame consistent with previous relief payment programs).
In the case of recent transferees, the method for calculating eligibility may affect the receipt of benefits.
A transferee’s adjusted gross income for the year of the relocation generally will be much higher than normal due to the addition of taxable relocation benefits. With moving expenses no longer excludable until 2026 under the Tax Cuts and Jobs Act of 2017, and multiple other costs, including gross-up costs, also included in the transferee’s income, it is very likely than many 2018 or 2019 transferees who would otherwise have been entitled to a 2019 payment may not get one, or will have it reduced. For example, a 2019 transferee with adjusted gross income without relocation of $70,000 who also received $30,000 of taxable relocation benefits will not qualify for a 2019 payment.
However, the legislation includes provisions that mitigates this concern for 2018 and 2019 transferees. In addition, the statute will affect some of those who move in 2020.
The relief payments are technically an advance of a credit against 2020 taxes. That is, the $1,200 is actually a credit against taxes owed for 2020, but sent out in advance. Under sections 2201(a) and 2201(e)(1) of the bill, the allowable credit for 2020 is based on 2020 income. The credit is reduced for that year by any amounts of advance refunds paid in 2019, “but not below zero,” according to the statute. The credit in 2020 is calculated eventually based on 2020 income, and any previous advance payments are taken into account at that time so that the credit is either reduced or increased. Transferees who received no payment in 2019 because relocation benefits were added to income in either 2018 or 2019 (whichever year is used to determine their advance payment) will be eligible to receive the amount in 2020 as a credit against 2020 tax, so long as their 2020 income is below the qualifying thresholds. However, 2020 transferees may be entitled to no credit if their 2020 income with relocation benefits exceeded the thresholds, although they may have received advance payments in 2019.
Consequently, the system will operate somewhat arbitrarily and confusingly for employees who are relocated in 2018 through 2020, and will present a challenge for relocation departments.
- Employee is relocated in 2018, and relocation benefits increase income beyond the threshold for receipt of an advance payment. If the employee has not yet filed a 2019 return with income reduced to normal levels, eligibility for a relief payment will be based on 2018 income, and no payment will be received in 2019. However, employee will eventually receive the full benefit as a credit against 2020 taxes so long as 2020 income is below the threshold.
- Employee in example (1) files his or her 2019 return. Advance payment will be received based on 2019 income, which does not include relocation benefits, and the allowable credit for 2020 will be reduced (but not below zero) by the payment.
- Employee is relocated in 2019, and relocation benefits increase income for that year beyond the threshold for receipt of an advance payment. If the employee files the 2019 return prior to calculation of the relief payments, no advance payment will be received in 2019, but full credit will be allowed against 2020 tax if income in that year is below the threshold.
- Employee in example (3) does not file the 2019 return, taking advantage of the IRS filing extension allowing filing by July 15. Employee will receive an advance payment in 2019 based on 2018 income (before the relocation). Credit in 2020 will be reduced to account for advance payment (but not below zero). However, if employee is entitled to a 2019 tax refund delaying filing will also delay receipt of the 2019 refund.
- Employee is relocated in 2020, and relocation benefits increase income beyond the threshold for receipt of an advance payment. But employee will still receive advance payment in 2019 based either on 2018 or 2019 income (depending on whether employee has or has not filed 2019 return prior to IRS calculation of payment). In 2020 employee will not be eligible for a credit against his or her 2020 tax.
For 2020 transferees, an open question is whether the language noted above that the allowable credit in 2020 will be reduced by earlier advance payments, “but not below zero,” means that these transferees will receive a windfall. That is, they will actually be entitled to no tax credit at all in 2020, based on their 2020 income, but will also not have to pay back the advance received in 2019. According to aides to the Republican Senate Finance Committee, that is the correct interpretation, but it remains to be seen whether eventual IRS regulations adopt a contrary position.
Finally, even though the statute mitigates the effect on transferees whose 2018 or 2019 income was artificially increased by one-time relocation benefits, it may not completely eliminate it. For example, assume a 2019 transferee whose income without relocation benefits was $75,000, but income with relocation benefits was $100,000. In 2020, in which there are no includable relocation benefits, the transferee’s income nevertheless increases to $85,000 due to salary increases or other income changes. That transferee would have received a full $1,200 rebate in 2020 absent the relocation, based on 2019 income, but received nothing. Although a tax credit is then allowable in 2020, it is reduced by 5% for every dollar of income over $75,000, and therefore limited to $700 ($1,200 minus 5% of $10,000) because of the phaseout provisions.
These issues will undoubtedly provoke questions from transferees to their relocation departments, and in some cases requests to be made whole. The examples above demonstrate that in most cases there will not actually be any financial detriment to transferees other than timing issues, but as the last example illustrates there will be a few cases in which relocation may be argued to have negatively affected the amount of the relief.