About 25,000 federal employees per year could face a massive new tax liability under a provision of the overhaul of the U.S. Tax Code President Trump signed into law this year, thanks to the removal of a deduction that helped employees forced to relocate by their agency.
The issue particularly impacts senior executives whose mobility is required as part of the job, as well as certain occupations—such as air traffic controllers—who are frequently asked to move around. As part of the relocation services it offers, the federal government pays for employees' moving costs related to household goods. That benefit was previously tax deductible and handled by the employee’s agency. The tax reform shepherded through Congress by Republicans last year removed that deduction, and now, with guidance unclear, agencies are passing the full burden on to the employees.
This has led to employees facing a one-time deduction from their paychecks of up to $7,000, according to the Senior Executives Association, which has been fielding complaints from its members. SEA joined with eight other employee groups in authoring a letter to the General Services Administration, the agency responsible, in conjunction with the Treasury Department, for issuing regulations related to relocation expenses and tax benefits. The issue, the groups said, could be fixed with a simple clarification from GSA’s Office of Governmentwide Policy.
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Such regulatory guidance would likely state that existing tax benefits offered to relocating federal employees, namely the Withholding Tax Allowance and the Relocation Income Tax Allowance, should include the tax liability resulting from the household goods benefit in their calculations. Employees are currently facing a 22 percent tax on the household goods benefit.
The groups said the large uptick is “clearly” an “unintended policy outcome” of the larger tax reform, albeit one that has the “potential to be personally ruinous to affected federal employees.” While employees are awaiting a fix from GSA and the Internal Revenue Service, they are working with their agencies’ human resources and finance teams to at least spread out the tax burden over the course of the year, rather than potentially wiping out one entire paycheck. Jason Briefel, SEA’s executive director, said it was unclear whether GSA could make whole employees already affected by the new tax policy or how such a reimbursement would occur.
A harder-to-resolve issue is also surfacing among new employees being asked to relocate for a job, Senior Executive Service employees making their final move home and existing employees returning from international duty. Employees in those situations are also facing a new tax burden thanks to the household goods deduction repeal and advocates expect a fix will require legislative action. The groups have been in touch with lawmakers on Capitol Hill to discuss potential remedies.
The fallout from the issue is already affecting both employees and agencies.
“The policy is specifically impacting those federal employees who already faced the daunting prospect of uprooting and relocating their entire lives in the name of public service,” the employee groups said in their letter. “It is our understanding that this impact is causing employees to face financial hardships, decline to accept new assignments, or even leave federal service.”
The issue could impact Trump’s efforts to bulk up the Border Patrol, which commonly hires employees in one location and assigns them to a post somewhere else. Employees at the Forest Service, Federal Aviation Administration, Justice Department and Defense Department are also commonly asked to move around and have disproportionately complained to various organizations representing them of a spike in their tax liability.