41 CFR § 302-17.45 - Procedures when a State treats an expense as taxable even though it is nontaxable under the Federal IRC.

If one or more of the States where an employee has incurred tax liability for relocation expenses treats one or more relocation expenses as taxable, even though it (they) are nontaxable under Federal tax rules, employees may be required to pay additional State income tax when they file tax returns with those States. In this case, the agency calculates a state gross-up to cover the additional tax liability resulting from the covered relocation expense reimbursement(s) that are nontaxable under Federal, but not State tax rules. The agency calculates the State gross-up and then adds that amount to the RITA. The agency will use this formula to calculate the state gross-up:

Equation 1 to § 302-17.45

Where:

F = Federal Marginal Tax Rate.

S = State Marginal Tax Rate.

C = CMTR.

N = Dollar amount of covered relocation expenses that are nontaxable under Federal tax rules but are taxable under State tax rules.

All information, except “N,” can be found in previous calculations (if moving to, from, or within Puerto Rico, follow the rules in § 302-17.43 to determine when to substitute “P” for “F”).

“N” is determined as follows:

1. Take the dollar amount of reimbursements, allowances, and direct payments to vendors treated as nontaxable under Federal tax rules.

2. Subtract the dollar amount of reimbursements, allowances, and direct payments to vendors treated as nontaxable by the State.

3. The difference represents “N.”

Note 1 to § 302-17.45:

This calculation is the same, regardless of whether the agency has chosen to use the one-year or two-year RITA process.