Great news! You’ve just accepted a new job and the hiring company is giving you $15,000 upfront to move your family, including your spouse, teenager, infant and even Fido. Surely, that will be enough to cover your household moving costs and other relocation expenses…right?
Well, maybe. It all depends on how you manage your lump sum package.
While it’s exciting to receive thousands of dollars upfront for moving expenses, there are some pitfalls to be aware when you plan the move. Before you start spending your lump sum, be sure to have a conversation with your HR department so that you understand what is intended to be covered, how it will be paid and how you will be taxed.
Below please find advice for effectively managing a lump sum package so that you, your family and your employer, get the most bang for your buck.
Understand Your Tax Situation
Unfortunately, lump sum payments for relocation expenses, including moving, are fully taxable as earnings. While some employees receive some tax assistance, or “grossed up,” lump sum packages in order to take home the full amount recommended for moving, others do not. Understandably, this creates a dilemma for transferees because there is often not enough money after taxes are deducted (about 40-45 percent) to pay for all of the things that the relocation package intended to cover.
Ask Your Employer about Direct Billing
Payments made directly by your employer for household goods moving services to the moving company, however, are excludable and do not need to be reported on your Form W-2 or IRS Form 3903. Therefore, if your company arranges a direct billing agreement with a provider for household goods moving, 30 days or less of storage, automobile transportation, etc. it will save both of you a taxation headache (in terms of timing and deductions). Direct billing arrangements also have other potential advantages, including replacement coverage for damaged or lost items at no cost to you, as well as moving priority.
Can you Expense Your Moving Costs?
Some companies prefer to avoid a direct billing arrangement for the whole employee relocation package, but you can ask them to include just your moving expenses on an expense report which you will submit for reimbursement. This will prevent you from being taxed on these exempt items. You will still need to list your moving expenses on IRS Form 3903 and they will show up in Box 12P of your Form W-2, but they will not be considered income.
Since your moving expenses will be paid outside of the lump sum, your actual lump sum payment will be less, but this is a benefit to you because it’s still being taxed as income. The remaining funds in your lump sum payment can be spent on other relocation items that your company intended to cover such as a home finding trip, temporary living or pet relocation.
The Tax Man Cometh
Some moving expenses are tax deductible.
If a direct billing agreement, or an expense agreement, is not arranged, you will be taxed on moving expenses upfront as part of the total taxes deducted from the entire lump sum payment. You will then have to wait until year end to claim your tax refund. You can claim the refund by filing IRS Form 3903 with your tax return to receive credit for taxes withheld in connection with the household goods moving portion of the lump sum payment. Make sure you keep all of your receipts associated with the moving and storage of your household goods.
Always consult a professional if in doubt about your federal or state tax responsibilities.
Plan Ahead for Relocation Incidentals
Relocation incidentals, such as a new driver’s license, home repairs, cable setup and utilities, add up quickly. It’s a good idea to allocate some of your relocation funds for these expenses so that you are prepared to settle in to your new home quickly, with as little stress as possible.
Finding a Mover
Once you have determined how your moving expenses will be handled, it’s important to pick an experienced, professional and reliable moving company. Your mover should be time sensitive and have a great customer service team to help your move go as smoothly as possible. You may want to ask your employer or relocation services company if they have a preferred van line. If you work with a mover that your company has a relationship with you may receive additional perks, such as a higher level of valuation coverage, at no extra cost.
A good moving company will advise you of moving best practices to protect you and your valuables. You should always make sure that the moving company employees are background checked, appropriately licensed and have a good safety record. Further, it’s important that they are willing to work with you to expedite settlement in event of a claim – take the time to ask them about their claim and valuation policies upfront, so that you know what to expect.
Caveat emptor! “Let the buyer beware”
It’s very tempting to cut costs on moving expenses in order to reserve lump sum funds for other items or services. The media is filled with reports of movers who are low-balling moving estimates in order to fit into your lump sum budgets. While some of those moving estimates may be legitimate, many are just unscrupulous ploys to book your move. In the latter case, you will likely be charged much more in the end and/or be subject to other customer service issues. If it sounds too good to be true, it probably is!
Before making a final selection on a household goods mover, move broker, or freight forwarder, you should vet any interstate transportation company you’re considering through the U.S. Department of Transportation’s ProtectYourMove.gov website to ensure that they are legit. This Federal Motor Carrier Safety Administration resource is packed with useful information, including the FMCSA’s consumer protection publication, Your Rights and Responsibilities When You Move.
Do you prefer to receive a lump sum for moving? Is it better for the company pay directly? Do you have any other tips for managing a lump sum move?