Relocation Considerations
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Consider this common scenario faced by many employees: Your supervisor
calls you into her office on a Friday afternoon and asks you to transfer
to the New York office. She says the new job includes a $10,000
increase in salary, and loads of potential "in the future." She gives
you the weekend to think about it. What do you say? No doubt, a million
questions start popping into your head. You've heard New York is expensive to live in. Is $10,000
enough? How much are the houses? What will your property taxes be? What
about income taxes? What about your wife's job? Will the kids like it
there? Will you like the new job? What is the impact on your career if
you refuse the job transfer?
According to psychologists relocation is among the most stressful events
that can happen to a person, or a family. Changing jobs, which often
occurs when relocating, is also high on the stress index. For many
people the decision to relocate involves a complex set of variables of a
financial, personal and emotional nature. These factors contribute to
the stress in varying degrees, depending upon the individuals involved.
The questions above can be broken down into two broad categories:
objective and subjective. The emotional and personal aspects of
relocation are subjective and thus difficult to model. Fortunately this
is not true of the financial ramifications, which are more objective and
easier to quantify. This article will discuss many of the financial
variables which should be considered by employers and employees before a
relocation decision is made.
When deciding on compensation packages for transferred employees,
employers often do not consider that each employee is an individual,
with unique financial considerations. No two families are alike and a
relocation analysis must reflect differences in income tax brackets,
housing size, property taxes, spousal income, dependents, etc. Using
generic cost of living indices does not produce an accurate calculation
of the financial impact of relocating. Using only a customized analysis
will produce a true apples to apples comparison. The battle cry of the
relocating employee is "AT LEAST KEEP ME WHOLE." In other words, the
employee should not have to relocate, absorb the emotional stress, and
lose money as well. The after tax cash flow should be at least zero.
An accurate, individualized, analysis has other benefits for the
employer. These are:
-
If the employee is presently living in a high cost of living area, and
the employee is moving out of this area to a lower cost of living area
the analysis will most likely show a positive cash flow, which will
encourage the employee to relocate.
-
Employers in low cost areas will find
the analysis useful in encouraging employees to transfer into the area
from higher cost of living areas, since the analysis will probably
show a positive cash flow. Lower salaries can be justified, and
demonstrated to the employee, thus saving expenses.
-
Employers in high cost of living areas
can use the analysis for employees moving into the area, from lower
cost areas, when cost of living concerns are negatively impacting the
relocation decision, and there is a resistance to relocation. An
analysis may convince the reluctant employee that the after tax cash
flow isn't as bad as they thought. Often, reluctant employees must
relocate to high cost areas for career advancement purposes, but want
just compensation, calculated in gross salary dollars. A confidential
analysis will show an employer how much the employee should be
equitably paid, to compensate for cost of living differences.
-
Employers can use the analysis to make
sure employees are comparing apples to apples in their relocation
decision. Many employees attempt to upgrade their standard of living,
usually through unfair housing and community comparisons, at the
employer's expense.
Most employees and employers perform a very superficial analysis of
the financial impact of relocating. This is understandable since it is
very complicated from a tax and financial planning point of view. The
typical analysis involves a comparison of housing in the new area with
the increased salary offer, if any. Or the salary is set based upon a
comparison to other employees in similar positions. The effect upon a
family's cash flow in the first year after the move is much more
complex than this simple analysis. As a result costly errors can be
made which affect not only the family's financial health but also
their happiness as well. An employee who feels unfairly treated is not
as productive, and may seek other employment. If the employee is worth
relocating he/she is worth fair compensation. After all, if suitable
talent were available locally the relocation would be unnecessary.
Relocation mistakes result in further relocation and additional stress
for both the family and for employers. Performing a proper analysis
before a relocation offer is accepted reduces stress by decreasing
uncertainty. This allows the employee to evaluate the relocation offer
more accurately, and provides benefits to the employer by increasing
employee happiness and retention.
Before describing the financial changes caused by relocation in more
depth it should be noted that the analysis should be performed, not
just for the relocating employee, but for the entire family. Often
relocation can cause major financial changes for spouses, companions,
fiancés, children, dependent parents, and others. Also, all changes
should include the federal, state and local tax impact, where
appropriate, at the individual's projected marginal rates of tax.
The analysis should compare the old salary with the change in family
salary, wages, and business income. It should not include changes that
would have occurred anyway had the family not relocated, since this
would obscure the real cost, and would be unfair to the employer. The
change should be net of federal, state, and local (city) income taxes,
as well as social security taxes. A common problem experienced by many
families, sometimes called the "trailing spouse" problem, occurs when
the spouse of a relocated employee experiences great difficulty
finding employment in the new area. The analysis should be able to
analyze the projected decrease in the spouse's income for the first
year after the move.
Another area often neglected by relocating individuals is the change
in wealth caused by changes in automobile expenses. This can be caused
by changes in commuting distances, automobile insurance rates,
personal mileage (for example to return home to see friends and
relatives, or to access qualified medical care), tolls and parking,
use of a company car, or an increase or decrease in amounts paid by
employers for business use of your personal car. Some of these changes
have tax effects and some do not. Most people underestimate how
expensive it is to operate an automobile, probably because the major
portion of the expense is depreciation (a non-cash item), and because
the expenses are paid gradually.
Changes in job benefits are often a factor if the employee is changing
employers, and occasionally when transferring within the firm. Items
to consider here include changes in medical insurance, life insurance,
plans, and other perquisites such as day care.
Changes in state and local income taxes should be included, net of
federal tax effects. The family's income should be recalculated using
the tax laws of the new state, and city (if there are city income
taxes). Consideration must be given for employees choosing to live in
one state and work in another, such as the millions of people who live
in New Jersey and work in New York. In such cases they will pay
non-resident income taxes in the state they are working in. Most
states have reciprocity agreements to prevent double taxation, which
permit residents to deduct taxes paid to other states.
Changes in housing costs are, of course, a major item. It is important
to make valid, meaningful, comparisons when comparing housing costs
between areas. For example, comparisons should be made which compare
the same size houses (square footage) . Also included should be the
real estate taxes, and rent, if the individual is not buying. Of
course, the federal income tax impact of these changes should be
included. Another factor to be considered is the change in interest
rates caused by exchanging the old mortgage for a new one. If the
employee is buying a cheaper house in the new area he/she may incur
federal and state capital gains taxes. This tax should not be included
in the analysis because it occurs only once, and should not be part of
the calculation of ongoing salary. Of course, the employee should be
reimbursed for this tax, since the relocation caused the imposition of
the tax. Likewise, if the relocation causes the family to have to sell
investment real estate, a partnership, or stock in a closely held
business then there will be capital gains or losses incurred because
of the realization of gains or losses on the sale of these assets.
Distance or increased job responsibilities may require that these
investments be sold. If the family wishes to compare owning vs.
renting, or renting vs. owning, the analysis should be able to do
this, although it may not be a fair comparison for negotiation
purposes.
Finally, the analysis should not include the cost of moving household
belongings, travel expenses including meals and lodging for the
family, temporary living expenses in the new area, pre-move house
hunting trips, real estate agent's fees, legal fees to buy and sell
houses, points to payoff an old mortgage or secure a new mortgage, and
redecorating expenses. These expenses are one-time expenses which will
not repeat in future years, and therefore should not be included when
calculating salary. Of course, the employee should be reimbursed for
these expenses, but if the purpose of the analysis is to show gross
salary equivalents then moving expenses should be excluded, since they
are not recurring. Most employers will pay some or all of these
expenses, but it is wise to be specific about what will be reimbursed.
The reimbursement of deductible expenses is not taxable, while the
reimbursement of non-deductible expenses is completely taxable.
Therefore the employee must be reimbursed for federal, state, local,
and social security tax impact on the portion of the reimbursement
which is non-deductible. This is called a 'tax gross-up' payment.
Since the tax gross-up payment is also taxable the calculation becomes
a little complex. Many employers do not calculate this amount
correctly. They usually do not reimburse for the state, local and
social security tax impact, and they assume all taxpayers are in the
same tax bracket.
This article has highlighted the important financial variables which
should be considered when making salary offers to employees who are
relocating. An analysis based upon a superficial comparison of cost of
living indices does little to reduce the very significant stress
associated with relocating and changing jobs. The analysis must be
individualized to each family, since families have different financial
profiles such as different incomes, house sizes, etc. Relocation can
be a significant financial planning tool when relocating to a lower
cost of living area, which can increase cash flow and provide
significant lifetime benefits which will help employees achieve their
financial goals. A thorough analysis will not only reduce pre-move
stress by eliminating financial uncertainty but will increase
post-move happiness for all involved.
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