States Begin to React to U.S. Moving Expense Change

The Tax Cuts and Jobs Act (TCJA) that passed U.S. Congress in December and was effective January 1, 2018, suspends the moving expense deduction/exclusion from 2018 through 2025.

Of particular interest to the mobility industry is how the states will react to the elimination of the deduction/exclusion for moving expenses. 

Of the U.S. states with an income tax, all but three follow the Internal Revenue Code (Code) to a considerable extent. That is, they begin their state tax calculations with either federal Adjusted Gross Income (AGI) or Taxable Income, with some additions/exclusions, etc.

This is called “conformity” in state tax parlance. However, the states conform in two distinct ways:

• About half of the conforming states follow what is known as “rolling” conformity, in which their tax law automatically defaults to the current version of the federal code.  In those states, the new law will apply for state purposes unless the state does something to prevent it. 
  
  
• The other half practice what is known as “static” conformity, in which they follow the federal code as of some fixed date. The “static” states must enact new legislation each time they wish to change the conformity date, and the new federal law will not apply there unless the state formally adopts it.

Some Static States Have Already Acted 

Six static states have conformed their tax law to the Code as revised. They are Georgia, Idaho, Ohio, Oregon, West Virginia, and Wisconsin. Moving expenses are not deductible/excludable in those states beginning in 2018.

Three static states have updated their conformity in ways that allow the continued excludability of moving expense payments/reimbursements. They are Arizona, Kentucky, and Virginia.

Virginia updated its conformity to include the Code as revised in the TCJA, but then proceeded to “decouple” from (make inapplicable) nearly all of the federal changes, including those for moving expenses.

Arizona updated its conformity only to the Code as of January 1, 2017. But the legislature intends to revisit the issue later in the year to consider the application of the TCJA.

Finally, Kentucky acted to deal explicitly with moving expenses in its conformity legislation. Kentucky moved its conformity date from December 31, 2015 to December 31, 2017. While this change would seem to have left in place a deduction/exclusion for moving expenses because the law only conforms as of the year prior to tax reform, the bill goes on to eliminate, among other deductions, the deduction for moving expenses. However, it does not specifically eliminate the exclusion from gross income for employer payments. So Kentucky should remain a state in which moving expense payments/reimbursements are excludable.

Static states that have not yet acted, and in which moving expenses continue to be deductible/excludable are Arkansas, California, Hawaii, Indiana, Iowa, Maine, Massachusetts, Minnesota, North Carolina, South Carolina, and Vermont.

New York State of Mind

Only one rolling conformity state has acted to keep the moving expense deduction/exclusion: New York. The state’s new budget law specifically decouples from some provisions of the TCJA, including the changes to the moving expensed deduction/exclusion. Therefore, moving expenses remain deductible/excludable in New York in 2018.

Two rolling conformity states have made changes to their tax laws in order to retain the personal exemption, but neither acted to preserve the moving expense deduction/exclusion. They are Michigan and Nebraska. 

The other rolling conformity states are: Alabama, Colorado, Connecticut, Delaware, Illinois, Kansas, Louisiana, Maryland, Missouri, Montana, New Mexico, North Dakota, Oklahoma, Rhode, Island, and Utah. The District of Columbia also practices rolling conformity. Moving expenses will now be nondeductible/nonexcludable (taxable) in all of those jurisdictions absent some future action by their governing bodies.

3 Non-Conforming States Keep Moving Expense Provisions

Finally, three states do not conform to the Code except on a selective basis. They are Mississippi, New Jersey, and Pennsylvania. Moving expenses are deductible/excludable in Mississippi and Pennsylvania, and excludable in New Jersey. None of those states has changed its law since enactment of the TCJA.

How This Will Impact Mobility

Worldwide ERC® members who gross up taxable relocation costs for U.S. state taxes will need to follow this subject closely and adjust gross-ups accordingly. At present, notwithstanding the change in the federal law, moving expenses remain excludable from the incomes of transferees in 18 states.