On December 22, 2017, President Trump signed the "Tax Cuts and Jobs Act" (H.R. 1) (the Act) into law, following approval by the House on December 20 and passage by the Senate on December 19. The Act contains provisions that affect individuals and employers of globally-mobile employees. Employers should evaluate the legislation and assess the effect of the changes on the cost of their mobility programs.

For a comprehensive discussion of the provisions affecting individuals, see Tax Alert 2017-2168. Provisions affecting employee benefits and executive compensation are discussed in Tax Alert 2017-2160.

This Alert focuses on the changes affecting individuals that may also affect the employer's cost of international work assignments.

Suspension of the deduction for moving expenses and exclusion for qualified moving expense reimbursement

Current law

Current law allows a taxpayer to claim a deduction for certain moving expenses incurred in connection with beginning a new job in a new location. An employer may exclude from employee wages, any reimbursements of qualified moving expenses.

Provision

The provision generally suspends for tax years 2018-2025 the deduction for moving expenses and the exclusion from gross income for reimbursement of qualified moving expenses, although the deduction and exclusion are available to active duty members of the US Armed Forces (or their spouses or dependents) who incur moving expenses pursuant to a military order or permanent change of station (PCS).

Effective date

The provision is effective for tax years beginning after December 31, 2017.

Implications

This provision will make it more costly for employers to relocate their employees who will likely require tax gross-ups for taxable moving expenses. Employers with mobility programs should:

— Revisit cost estimates for repatriation of assignees after December 31, 2017 as the incremental tax costs would not have been included

— Revisit estimates for upcoming assignments where moving expenses will be incurred after December 31, 2017 and update budgets

— Look to mitigate tax gross-up cost by leveraging unused excess foreign tax credits

— Consider alternatives such as:

1. Substitute furnished accommodations for large household goods shipments and measure the cost and tax effect; a portion of the furnished accommodations may be excludable under Section 911
2. Substitute a discretionary allowance for large household goods shipments and measure the cost and tax effect

Increase in standard deduction and repeal of the deduction for personal exemptions

Current law

Under current law, adjusted gross income (AGI) is reduced by either the standard deduction or itemized deductions, if the taxpayer chooses to itemize. For the 2017 tax year, the standard deduction is:

— $6,350 for single individuals and married individuals filing separately
— $9,350 for heads of households
— $12,700 for married couples filing jointly

Current law allows a taxpayer to claim a personal exemption for the taxpayer, his or her spouse, and any dependents. The amount that may be deducted for each personal exemption in the 2017 tax year is $4,050. The personal exemption begins to phase out for taxpayers at certain income levels: single taxpayers beginning at $261,500; heads-of-household beginning at $287,650; married couples filing jointly beginning at $313,800; and married taxpayers filing separately beginning at $150,000.

Provision

The provision increases the standard deduction to:

— $24,000 for married couples filing jointly and surviving spouses
— $18,000 for single filers with at least one qualifying child
— $12,000 for all other taxpayers

The provision suspends the personal exemption deduction for tax years beginning between January 1, 2018 and December 31, 2025. Interestingly, the provision also provides that the Treasury Secretary may administer the Section 3402 withholding rules, without regard to amendments made by the provision, for tax years beginning before January 1, 2019. (Whether wage withholding rules remain unchanged for 2018 will be at the Treasury's discretion.)

Effective date

The provision is effective for tax years beginning after December 31, 2017.

Implications

The increase in the standard deduction should simplify federal income tax filings for millions of taxpayers. This is one of the few areas of the Act that can be said to simplify taxes for individuals. Of course, this simplification will only last through 2025. This may also help to mitigate the effect of the loss of deductions for real estate or state and local income taxes for taxpayers who currently itemize with total itemized deductions below this standard deduction.

The suspension of the personal exemption deduction appears to affect certain nonresident aliens working in the United States. Under present law, a nonresident alien is allowed one personal exemption deduction (with certain exceptions). Nonresidents with a very limited amount of income earned while working in the United States do not have to file a US income tax return if their US income does not exceed the personal exemption amount. This is often the case in the year after the year a US assignment ends. Under the Act, nonresidents working in the United States will be taxed on their first dollar of income (no personal exemption deduction) and may, therefore, have to file a tax return that would not be required under present law.

In addition, nonresident aliens are not allowed to claim the standard deduction. Depending on the circumstances, a nonresident's deductions (generally only state or local income tax, miscellaneous business expenses related to their US income, casualty and theft losses, and gifts to US charities) are limited or eliminated under the Act. This may result in an increase in the US income tax liability for nonresidents working in the United States. However, in many cases, double taxation may be avoided because the US tax may be allowed as a credit on the individual's home country income tax return.

Enhanced child tax credit and new family credit

Current law

Generally, a taxpayer may claim a $1,000 tax credit for each qualifying child who is younger than 17. A qualifying child must be a US citizen, national or resident. The aggregate amount of the credit that a taxpayer may claim is phased out for taxpayers with AGI above $75,000 for single taxpayers and heads of households, or above $110,000 for married couples filing jointly and $55,000 for married individuals filing separately. The credit may be claimed under the regular tax system and the alternative minimum tax (AMT).

Provision

The provision temporarily increases the child tax credit to $2,000 per qualifying child, but retains the current-law age limit for a qualified child, permitting the credit to be claimed for each qualifying child who is younger than 17. The provision also temporarily provides a $500 nonrefundable credit for qualifying dependents other than qualifying children. The maximum refundable amount of the credit will not exceed $1,400 per qualifying child. The Social Security number for each qualifying child must be provided on the tax return on which a credit is claimed.

The income level at which the credit begins to phase out is $400,000 for married taxpayers filing jointly and $200,000 for all other taxpayers, not indexed by inflation.

Effective date

The provision is effective for tax years beginning after December 31, 2017.

Implications

The child tax credit was an important part of the individual provisions. The increase in the child tax credit was a necessary mechanism to keep middle income taxpayers from potentially seeing a tax increase when they switch from itemized deductions to the new elevated standard deduction. However, this also leads to a case where taxpayers without children may see their taxes increase under the Act because they don't have the credit offset.

Non-US citizens living and working in the United States may see an increase in tax liability due to the Social Security number requirement for the $2,000 tax credit for a qualifying child. While non-US citizen children of US residents may be eligible for the $500 credit, they may not be eligible for the $2,000 tax credit. There still will be a requirement to have an Individual Taxpayer Identification Number (ITIN) for dependents eligible for the $500 credit.

Employers who offer tax compliance services for globally-mobile employees may need to:

— Review their process for determining US tax assistance eligibility with respect to the lower filing threshold for nonresidents (discussed above)

— Evaluate options for establishing a threshold for authorizations for tax assistance

— Adjust budget for tax costs and tax services in accordance with policy

— Consider whether the cost associated with obtaining an ITIN will continue to yield a reduction to overall program costs, in light of the new tax provisions

Repeal of certain miscellaneous itemized deductions subject to the 2% floor

Current law

Under current law, individual taxpayers who itemize may claim deductions for certain miscellaneous expenses. Some of these expenses must exceed 2% of the taxpayer's adjusted gross income (AGI) to be deductible, including:

— Expenses for the production or collection of income (investment expenses, etc.)

— Unreimbursed expenses attributable to the trade or business of being an employee

— Repayments of income received under a claim of right (only subject to the 2% floor if less than $3,000)

— Repayments of Social Security benefits

— Shares of deductible investment expenses from pass-through entities

Provision

The provision suspends all miscellaneous itemized deductions subject to the 2% floor under current law, and does not apply to tax years beginning after December 31, 2025.

Effective date

The provision is effective for tax years beginning after December 31, 2017.

Implications

Employers of globally-mobile employees should consider the effect of the suspension of the following deductions on the US tax cost of their mobility programs.

Unreimbursed business expenses

Many employers reimburse business travel expenses under the so-called accountable plan rules. When those rules are followed, the expense reimbursements are not treated as income to the employee. The provisions of the Act do not affect these rules. Therefore, travel expenses incurred while an employee is away from home on business will continue to be excluded from the employee's wages, as long as the employer has an accountable plan in place.

Under present law, employees who receive a lump sum payment for business travel expenses (which is included in their wages), may deduct their actual expenses on their income tax return, to the extent the expenses exceed 2% of AGI, when combined with other miscellaneous deductions. The employee must maintain adequate records to claim the deduction. Under the Act, the deduction is not allowed. Employers should consider whether they will begin to follow accountable plan rules for business expenses, reimburse employees for the cost of the lost tax deduction, or transfer the tax cost of the lost deduction to the employee.

Repayments under a claim of right

Employees on overseas assignments whose employers pay for the excess tax costs associated with the assignment may have to make a repayment to the employer, based upon the final "tax equalization" calculation for the assignment year. Under present law, these wage repayments are claimed as a miscellaneous itemized deduction subject to the 2% AGI limitation, if the amount of the repayment is less than $3,000. For payments of $3,000 or more, either a deduction is claimed in the year of the repayment, or a tax credit is claimed for the reduction in tax (calculated as if the amount of wages repaid were never received by the employee).

Under the Act, the deduction for a repayment that is less than $3,000 is eliminated. The treatment of the deduction or credit for repayment of $3,000 or more is not changed. However, due to the limitation of other itemized deductions (such as state and local taxes), and the resulting increase in use of the standard deduction, it may be difficult to assess the increase in tax and administrative cost related to repayments of wages.

Foreign real property tax

Under present law, employees on overseas assignment in the United States may have taken a deduction for real property taxes paid on a property in their home country. Under the Act, these real property taxes may not be claimed as an itemized deduction. However, if the property is rented, the deduction may be claimed along with other rental expenses.

Provisions not included in the Act

Provisions that created a lot of discussion and concern that did not make it into the Act include:

— Modification to the rules for exclusion of gain on the sale of a principal residence

— Requirement to use a "first in, first out" method for cost basis related to disposition of securities

— Immediate taxation of vested benefits in a deferred compensation or equity plan

— Modification of treatment of housing expenses provided for the convenience of the employer, including expenses related to housing outside the United States in a "camp" used to house at least 10 employees in a remote location, which does not have suitable housing available

Next steps

The following actions may be required as a result of the tax reform:

— Review of assignment budgets and adjustments where necessary

— Revise tax accruals

— Review of assignment policy provisions and tax equalization plans to evaluate the effect of tax reform

— Amend policies to conform with the tax reform changes

— Evaluate effect on current processes and systems, including payroll

— Socialize potential changes with the business and the employees

———————————————