On February 7, 2019, the IRS clarified in its frequently asked questions about moving expenses that nontaxable moving expenses incurred by civilians prior January 1, 2018 should not be reported on the 2018 Form W-2 in box 12, code P.

The guidance is surprising because the IRS clarified in IR-2018-190 and Notice 2018-75 that moving expenses incurred by civilians prior to January 1, 2018, but reimbursed on and after January 1, 2018, follow the rules prior to enactment of the Tax Cuts and Jobs Act (TCJA).

This IRS clarification comes as a result of tax filing service providers rejecting 2018 Forms W-2 with information included on Form W-2, box 12, code P for non-military personnel.

Background

Under the TCJA, reimbursements for moving expenses made to employees or paid directly to third parties on and after January 1, 2018, and through December 31, 2025, are included in wages subject to federal income tax (FIT), federal income tax withholding (FITW), Social Security/Medicare (FICA) and federal unemployment insurance (FUTA). An exception to this provision applies to members of the Armed Forces on active duty moving pursuant to a military order and incident to a permanent change of station. (TCJA Section 11048.)

Prior to January 1, 2018, IRC Section 132(g) allowed an exclusion from wages for FIT, FITW, FICA and FUTA purposes under IRC Section 132(a)(6) for moving expenses reimbursed or paid directly by the employer to the extent those moving expenses were deductible under IRC Section 217. Under IRC Section 217, the exclusion applied to the cost of moving household goods and personal effects from the former residence to the new residence, the first 30 days of storage for a domestic move, and lodging and mileage expenses incurred during the period of travel from the former residence to the new place of residence. Special rules applied to foreign moves. Additionally, nontaxable moving expense reimbursements paid directly to employees were reported on Form W-2, in box 12, code P. (See IRS Publication 521 and Form 3903.)

In IR-2018-190 and Notice 2018-75, the IRS announced that moving expenses incurred prior to 2018 but that are reimbursed or paid in 2018 are excluded from wages subject to FIT, FITW, FICA and FUTA if they were excluded from taxable wages prior to the changes made under the TCJA. This rule also applies to payments made to a third-party in 2018 for moving services provided prior to 2018.

To qualify for this exclusion from taxable wages in 2018, the IRS explains that employees must not have deducted the expenses on their 2017 federal personal income tax return.

Ernst & Young LLP observations

Employers may need to issue a Form W-2c without the information in box 12, code P in those cases where tax filing software or a third-party tax preparation provider is rejecting 2018 Forms W-2 with information included in box 12, code P for civilian employees. In this case, employers should consider providing employees with a separate statement showing the nontaxable moving expenses that were paid directly to the employee.

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