CRP Financial and Tax Aspects of Relocation 2 — Questions and Answers
Question 1: What is the primary purpose of a 'cost-of-living differential' payment to a transferee?
- To reward the employee for accepting the transfer
- To maintain the employee's purchasing power in a higher-cost destination (Correct answer)
- To cover moving truck fees
- To replace the home sale program
Correct answer: To maintain the employee's purchasing power in a higher-cost destination
Cost-of-living differentials ensure employees can afford the same goods and services in the new city as they could at origin.
Question 2: Which index is most commonly used to compare cost-of-living between U.S. cities in relocation policy?
- Consumer Price Index (CPI)
- ACCRA/COLI index (Correct answer)
- Producer Price Index (PPI)
- Housing Affordability Index
Correct answer: ACCRA/COLI index
The ACCRA Cost of Living Index (now C2ER COLI) is the standard benchmark used in relocation to quantify cost differences between cities.
Question 3: Mortgage differential assistance is provided when:
- The employee's new home is more expensive than their old one
- The employee must carry a higher interest rate on a new mortgage than their old one (Correct answer)
- Interest rates fall after the employee purchases
- The employee uses an RMC-referred mortgage lender
Correct answer: The employee must carry a higher interest rate on a new mortgage than their old one
Mortgage differential benefits compensate employees for the increased monthly payment caused by a higher interest rate environment when they must refinance or take a new mortgage.
Question 4: In relocation, 'prima facie' tax exposure most often arises when:
- An employee asks for extra benefits
- An assignee creates a taxable presence (permanent establishment) in a jurisdiction by working there too long (Correct answer)
- The employer fails to file RESPA disclosures
- A lump sum exceeds IRS limits
Correct answer: An assignee creates a taxable presence (permanent establishment) in a jurisdiction by working there too long
Extended work in a foreign or domestic jurisdiction can create tax obligations for both the employee and the employer entity under permanent establishment rules.
Question 5: What does a 'tax assistance' benefit (as opposed to tax equalization) provide to a relocating employee?
- Full coverage of all taxes owed anywhere in the world
- Reimbursement for tax preparation costs incurred due to the relocation (Correct answer)
- Exemption from state income taxes in the new state
- A reduction in taxable wages for moving expenses
Correct answer: Reimbursement for tax preparation costs incurred due to the relocation
Tax assistance benefits typically cover professional tax preparation fees the employee incurs because of the complexities introduced by the move.
Question 6: Active military members are treated differently from civilian employees under current U.S. tax law in that:
- They receive larger lump sums
- Their qualified moving expenses reimbursed by the government remain tax-free (Correct answer)
- They are exempt from all state income taxes after relocation
- Their household goods are shipped at no cost
Correct answer: Their qualified moving expenses reimbursed by the government remain tax-free
The TCJA retained the moving expense exclusion for active-duty military members ordered to a permanent change of station, unlike civilian employees.
CRP Financial and Tax Aspects of Relocation 2
What is the primary purpose of a 'cost-of-living differential' payment to a transferee?