Central to relocating with a company, relocation allowances are a lump-sump amount your company provides for an international relocation. But how should you manage them, and are they taxable?
Just learning about relocation allowances? Start here!
You’ve just been told that you have an opportunity to move overseas with your company. Exciting right? But also daunting, and perhaps confusing.
A lot of the jargon associated with corporate relocations might be new to you if you’ve not moved internationally before. One thing you’re probably grappling with are relocation allowances (also called relocation reimbursements). In essence, this is what your company is willing to cover, usually up to a certain lump sum amount.
Relocation allowances can cover a variety of expenses related to your move, such as packing and shipping of household goods, temporary housing, transportation costs, and even cultural training. It’s important to understand that relocation allowances are typically considered taxable income by the IRS. This means that you may need to report the amount of your relocation allowance on your tax return and pay taxes on it.
To manage your relocation costs effectively, it’s a good idea to keep detailed records of all expenses related to your move. This includes receipts for moving services, temporary housing costs, and any other expenses that are covered by your relocation allowance. By keeping organised records, you can easily track how much of your allowance has been used and ensure that you are not exceeding the allotted amount.
If you have any questions or concerns about managing your relocation allowance or the tax implications, it’s best to consult with a tax professional or financial advisor. They can provide guidance on how to properly report your relocation allowance and ensure that you are in compliance with tax laws. Remember, proper planning and organisation can help make your international move a smooth and successful transition.
Are relocation allowances taxable?
This is probably one of the most crucial questions from your point of view, and it entirely depends on where you are legally based initially, before moving:
Australian law on relocation allowances is governed by the Fringe Benefits Tax (FBT) Assessment Act (1986). The basic answer is that relocation expenses are considered exempt from the FBT tax if specific conditions are met, namely: provided that the relocation is from one work location to another and that the expenses (household goods etc.) are directly attributable to the move.
The relevant law in New Zealand is the Income Tax Act (2007). Like Australia, relocation allowances are not considered taxable income in New Zealand provided certain criteria are met. In this case, that they are “reasonable” and “directly related to the move”. This includes movement of household goods, temporary accommodation, and travel expenses. You can review the exact definition and conditions within the legislation here.
According to the Tax Cuts and Jobs Act (TCJA) 2017, most relocation allowances (and “reimbursements”) are considered taxable income. So, allowances are subject to the usual battery of Federal Income Tax, Social Security and Medicare. Prior to this period, relocation allowances weren’t considered taxable, HR Block has more information about this here.
The U.K. is slightly different than the U.S., in that relocation expenses up to £8,000 are not considered taxable. However, it must meet certain criteria set by U.K. tax authorities such as: the cost of moving household furniture and effects, the cost of traveling to your new home and expenses related to the sale or purchase of a new home, such as legal fees. This is dealt with by the Income Tax (Earnings and Pensions) Act of 2003 and the tax information resource, Croner-i, has more information on their website.
How should I manage my relocation allowance?
With that out of the way: how do relocation allowances work, and how should you manage them? This eight-step process isn’t exhaustive, but it has been created with our decades of experience to give new expats something of a primer.
1. Understand your relocation package
Before you start packing boxes, understand what your relocation package includes both in terms of absolute value and coverage. Companies typically customise their relocation allowances to cover various expenses such as moving costs, temporary lodging, travel expenses, and sometimes even real estate services.
Ensure you have a detailed discussion with your HR department about what is covered and what is not. Ask for this information in writing to avoid any misunderstandings later. Most importantly: remember to keep an open line of communication with whichever HR representative is handling your move, so you can ask them questions as you move through the checklist below.
If you’d like an outside source, our “Future of Work” overview should give you some idea of what to expect from a progressive organisation’s allowance when they’re planning your relocation.
2. Create a budget
Once you know what expenses are covered, the next step is to create a budget. List all potential costs of the move, including those not covered by your employer.
Common expenses include packing supplies, movers, temporary accommodations, travel costs, storage fees, and unexpected necessities upon arrival like groceries or new furniture. Compare these costs against your allowance to see where you need to allocate funds most effectively. Remember to understand that a relocation isn’t just about transporting your belongings internationally and settling in, it also needs to include sometimes extensive visa application fees too.
Note that your budget will be heavily contingent upon yours and your family’s status. Are there any health conditions which will require treatment? Do you have a marital partner and dependent children?
You’ll need to interrogate whether the allowance covers their education. You can also check out our comprehensive “Moving as a couple guide” for information about benefits available to your spouse.
3. Prioritise expenses
Prioritisation is key with any project. Start with the essentials: moving your belongings and securing housing. If your budget and allowance provide for more, consider quality-of-life expenses that could make your transition smoother. These can be settling in services, such as professional unpacking at destination, or a scouting trip to your new city to find housing and schools.
4. Keep all receipts!
For reimbursement purposes, keep meticulous records of all relocation-related expenses. Save receipts and even emails related to your move. Where possible, ask for an invoice. Some companies require original copies for reimbursement, so make sure to ask about the specific documentation needed and how the reimbursement process works.
5. Ask about advance and direct payments
Some companies offer advances on your relocation allowance, which can be particularly helpful for covering upfront costs like security deposits or first and last month’s rent. Others might pay certain costs directly, such as hiring movers or booking travel tickets. These options can provide significant relief by reducing the amount of cash you need to pay out of pocket.
6. Consider tax implications
As mentioned in the beginning: Relocation allowances can have tax implications, depending on where you live and the specifics of your relocation package. In some cases, these allowances can be considered taxable income. Despite our knowledge and experience, we always recommend that it is wise to consult with a tax professional if you are unsure, to understand how your relocation benefits will impact your tax situation.
For other aspects, like money transfer, we provide a full stack of accredited partner services. You can read more about this in our guide to managing money overseas, here.
7. If necessary, negotiate!
If your initial relocation package does not fully cover your expected expenses, don’t hesitate to negotiate with your employer. Be prepared with a detailed breakdown of your estimated costs to make a strong case that reflects your requirements: family needs, present standard of living and more.
Companies are often willing to review and adjust relocation packages to ensure a smooth transition for valuable employees – remember that a good package isn’t just important for your own comfort and wellbeing, it ensures that the company itself is more likely to get good results from it too!
8. Utilise what’s available to you to its fullest extent
Finally, take advantage of any additional resources your company might offer, such as access to a relocation consultant or connections with real estate agents in your new city, note that many professional relocation firms will provide a full ‘home search’ service to find a new residence suitable for your needs.
These resources can provide valuable guidance and potentially save you money and time. Make sure you’re aware of every benefit and every resource!
Mulling how to manage your relocation allowance? Crown World Mobility are one of the world’s leading international relocations firms and have moved millions of families since we were founded in 1965. Get in touch with us today and we’ll make it simpler!
