New tax law doesn’t grandfather in bonus contract

Q: In October 2017, I accepted a job that required me to move from Milwaukee to Albuquerque. I signed a contract, and part of the deal I negotiated is that the employer would pay me $3,000 for moving costs. I did move in the first week of January (3rd through the 7th) and my total costs were $3,240. The employer asked for receipts and then reimbursed me $3,000. I was recently informed that the $3,000 must be reported to me as taxable compensation because the new tax law eliminated a deduction for moving costs. All of that is easy for me to understand, but I had a signed contract in October that guaranteed me the reimbursement. Is there an exception to people who incur moving costs after 2017 based on an enforceable agreement made in 2017? It was my understanding in October that I would not pay taxes on the $3,000. I would have tried to negotiate a larger amount if I knew I would be taxed on the reimbursement. This seems like a classic situation where existing contracts should be subject to the law that applied when the contract was signed.

Well, I would first like to congratulate you for your assessment of grandfather provisions sometimes found in new tax law provisions. But this item, moving expenses, it just not one of the provisions Congress decided to grandfather.

While you may end up with income for this reimbursement, the employer’s tax position has not changed. The employer could have deducted this payment in 2017 and, because it is reported as income to you, they will still deduct it in 2108.

I mention that point because it will be difficult to ask the employer to increase the allowed reimbursement to compensate you for the unexpected tax cost. If the employer’s tax position changed from no deduction to a deduction, to match the employee’s tax treatment, they might agree to raise the reimbursement.

Because Congress did not make any allowance for an employee who had a pre-2018 binding agreement to reimbursement post-2017 expenses, you must include the reimbursement in income.

You could ask the employer to “gross up” the reimbursement to adjust for the tax law change. They do not have to do so, but it’s worth a try.

By a gross up, I mean that if they give you more money to compensate you for the unexpected income, that additional payment is itself taxable.

Q: Is there a rule that allows an employee to elect to report income earlier than the employer’s W-2 reporting? My situation is I started a job in September after finishing college. My 2017 income is low because I only had three months of salary. In early December, I found out I qualified for a $5,000 bonus. The firm is a national company and they had to process the bonus through the national office. I didn’t get the bonus until the second week of January. The bonus is not on my 2017 W-2, but I want it to be — 2017 is a much better year for me to report the income. Can I elect to do that, or just do it? Would the IRS really care if I report the income early?

There is no election to report income early when a “cash method” taxpayer did not receive (or constructively receive) the income in the earlier year.

If the employer had provided you with the

opportunity to receive the bonus in 2017, and you chose not to take the bonus, you would still be taxed in 2017. This is because your ability to get the funds in 2017 means you “constructively” received the money.

Your situation is quite different. You wanted the income in 2017, but there was no action that you could have taken to get the money. You had to depend on the employer’s actions to be completed before you could receive the money.

You did not actually receive the money in 2017, and you had no opportunity to receive it in 2017. This means there is no tax law argument to even allow you to report the income a year early.