The recently enacted Coronavirus Aid, Relief, and Economic Security (CARES) Act is designed to provide significant tax relief and incentives for individuals and businesses impacted by the COVID-19 disease. This bill includes the greatly anticipated provision of recovery rebate credits to individuals. The Treasury Department is expected to begin issuance of these checks to taxpayers within the next week. As such, it is critical that companies understand the law and possible impact on their mobility program and employees. To assist in your assessment of this impact, we provide answers to commonly asked questions regarding the rebate and possible impacts on mobile employees.
What is the Recovery Rebate?
Individual taxpayers will receive a rebate credit against 2020 taxes equal to $1,200 for individuals, or $2,400 for joint filers, plus $500 for each qualifying child. The rebate credit will ultimately be calculated and reflected on the taxpayer’s 2020 US federal income tax return. However, the government will make advance refunds of the credit as soon as possible, with eligibility and credit amounts based on information from 2018 or 2019 tax returns (if the 2019 tax return has been already filed). The advance refund reduces the amount of the taxpayer’s credit for the 2020 tax year, but not below zero. Taxpayers will not have to return any excess advance refund following calculation of rebate credit on their 2020 tax return.
GTN Observation: Potential Impact on Mobility Program
The law provides for a credit against 2020 income with advance refunds of the rebate happening during 2020 to provide immediate stimulus to the economy. The advance refunds are based on either 2018 or 2019 US federal returns. As described below, mobility related tax positions and compensation adjustments that are applicable for these three years may impact the employee’s ability to receive an advance payment. It is important for the mobility program to proactively create and communicate its policy on addressing this impact.
How will the advance refund be calculated by the IRS?
As noted, eligible taxpayers will receive advance payments based on the filing status reflected on either their 2018 US federal tax return (or 2019 US federal return, if already filed) and the number of qualifying dependent children. Individuals filing on a single basis can receive up to $1,200, with joint filers receiving a maximum payment of $2,400. Additional payments of up to $500 also apply for taxpayers with qualifying dependent children.
The specific amount of the advance payment will depend on the amount of adjusted gross income (AGI) reflected on the applicable US federal return. Specifically, the amount of each recovery rebate credit is phased out by $5 for every $100 in excess of a threshold amount. This threshold amount is based upon 2018 AGI (unless a 2019 return has already been filed). The phaseout begins at $75,000 for single filers, $112,500 for heads of households, and $150,000 for joint filers.
Thus, the rebates are eliminated for single filers with 2018 (or 2019, if applicable) AGI over $99,000, heads of household with $136,500, and joint filers with $198,000. Once the maximum income threshold for the individual or married couple is reached, the credit for each qualifying child phases out with each additional $10,000 in AGI over the threshold. So, for example, a joint filer with two qualifying children would not receive any rebate once AGI reaches $218,000.
GTN Observation: Potential Impact on Mobility Program
The advance payments are based on AGI as reported on taxpayers’ 2018 or 2019 US federal tax returns. Because this credit is based on adjusted gross income, employees who have received taxable benefits from your organization in 2018 or 2019 could see an impact to their advance payment.
For example, it is common for expatriates on tax equalized assignments to receive allowances or taxable reimbursements relating to housing, cost of living, and tax payments/gross-ups. These additional add-ons to their Form W-2 could result in the employee not qualifying for an advance rebate. Will your organization issue advance payments based on stay-at-home income levels now, factor the rebate into the employee’s 2019 or 2020 tax equalization calculation, or decide that any employee will only receive a benefit if available from the IRS?
In addition to traditional mobility arrangements, this same impact could apply to any category of mobile employee in your organization. For example, your organization may provide reimbursement for taxable moving expenses that are provided to permanent transfers. Some organizations will provide tax reimbursement for business travelers with multi-state tax burdens. Employees with this additional taxable compensation could see reductions or elimination of rebate credits due to the inflated levels of income.
In addition to employees who are potentially disadvantaged, your policy will also need to consider cases where employees are benefitting from reduced taxable income for the years involved. For example, the definition of AGI used for the calculation does not include an add-back for income that has been excluded for expatriates who have qualified for and elected to use the foreign earned income exclusion. Would your policy claw back this assignment-related windfall from the employee at the time the 2020 tax equalization is completed?
Although IRS stimulus checks are not considered taxable income for US federal and state purposes, the tax position would need to be considered for any “hypothetical” tax advances or payments made to employees under your organization’s policy. Depending on the number of employees, it may be prudent to work with your organization’s tax and finance team to make sure appropriate accruals are calculated to avoid unexpected organizational costs.
Once policy decisions are made, it will also be critical for companies to maintain consistent lines of communication with impacted employees, so they understand the approach taken and timing of any payment or reconciliation.
Which taxpayers are eligible for the rebate credit?
In order to be eligible for a recovery rebate, the individual must:
- Not be a nonresident alien,
- Not be claimed as a dependent on another taxpayer’s return,
- Not be an estate or trust.
In addition, a valid Social Security number must have been included for the taxpayer, the taxpayer’s spouse, and eligible children (or an adoption taxpayer identification number, where appropriate). Please note individuals with Individual Taxpayer Identification Numbers (ITIN’s) do not qualify for the recovery rebate credit.
It is important to note that the term “qualifying child” currently means a qualifying child of the taxpayer based on the rules that apply for the Child Tax Credit (i.e., limited to children who have not attained age 17).
GTN Observation: Potential Impact on Mobility Program
As noted, the law specifically excludes nonresident aliens from the definition of a qualified taxpayer. However, additional clarification will be needed on how part-year residents are treated for purposes of the advance refund and subsequent 2020 rebate credit calculation.
The eligibility requirements are also explicit in requiring valid taxpayer identification numbers for the taxpayer, spouse, and qualifying children. Individual taxpayer identification numbers, which are often applicable for trailing spouses and children of foreign nationals working in the US, are not included in this definition. As such, the rebate credit may not apply for certain of your organization’s inbound mobile employee population.
As there are already proposals to expand the definition of a “qualifying child,” it is possible that this definition will be expanded to include certain students and types of dependents.
We expect further guidance will be provided by the IRS, so it will be critical to monitor developments closely, including provision of updated communications to impacted mobile employees.
Are there other policy considerations for global relief efforts related to COVID-19?
While we have discussed the impact of stimulus benefits from a US-centric perspective, companies also need to consider the potential impact of non-US stimulus efforts on their mobility programs.
Many countries (if not the vast majority) are also offering different types of stimulus packages to support individuals and businesses impacted by COVID-19. On the individual tax side, the approach has varied, with many locations offering filing extensions, providing payment deferrals/holidays, or providing direct payments to individuals.
Companies will need to monitor and understand the benefits that may be provided to mobile employees by Host country jurisdictions. Will company subsidies apply to those who may not receive full benefits due to mobility-related compensation? Will employees who receive unexpected benefits be required to remit any windfall back to the company?
While additional research would need to be performed for specific locations, the International Monetary Fund is tracking and summarizing the key economic responses many countries are taking in response to the COVID-19 pandemic.
By working with your mobility tax provider to monitor and assess this ever-changing economic and tax environment, your company will be well positioned to set policies that are most appropriate for your organization and its employees.
If you have questions about the information provided, or about how COVID-19 is affecting your mobility program, we are here to help. Schedule a call with our team to discuss your specific situation.
The information provided in this article is for general guidance only and should not be utilized in lieu of obtaining professional tax and/or legal advice.
Author: Sajjad Abadin, Senior Manager
Sajjad began his career with GTN in 2014 and currently serves as Senior Manager in GTN’s Great Lakes region. He has nearly 15 years of experience in expatriate and foreign national tax preparation and consulting. He oversees multiple companies’ mobility tax programs as well as many independent assignees. Clients rely on Sajjad to expand their understanding of complex mobility tax issues, and they put trust in his ability to coordinate and manage the intricacies of their specific mobility programs. sabadin@gtn.com | +1.708.887.0275
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