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 isnt 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 employers 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 familys 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 familys 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 individuals 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 spouses 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 familys 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.
