A Relocation Income Tax Allowance is a supplemental payment federal agencies add to a transferred employee’s relocation package to reimburse the federal, state, and local income taxes owed on the taxable portion of their moving benefits. Because the IRS treats nearly every employer-paid moving expense as taxable wages, the allowance exists to keep the employee closer to whole after taxes. It is calculated using the employee’s combined marginal tax rate and can run on either a one-year or two-year cycle under 41 CFR Part 302-17.1eCFR. 41 CFR Part 302-17 – Taxes on Relocation Expenses
Why the Allowance Exists
Every dollar an employer pays toward a civilian employee’s relocation is taxable wages. That covers lump-sum relocation bonuses, reimbursements against receipts, and payments the employer sends directly to a moving company. The full value lands on the W-2 in Box 1.2Internal Revenue Service. Employer’s Tax Guide to Fringe Benefits (2026)
Before 2018, qualified moving expense reimbursements were excludable from income under 26 U.S.C. § 132(g), and employees could deduct unreimbursed moving costs above the line. The Tax Cuts and Jobs Act suspended both provisions, and P.L. 119-21 made the change permanent for tax years beginning after December 31, 2025.3Office of the Law Revision Counsel. 26 USC 217 – Moving Expenses The federal government still pays to move its transferred employees, but the tax code now treats those payments as ordinary income. RITA is the government’s response to that mismatch.
The relocation payment itself triggers federal income tax, Social Security tax (6.2% on earnings up to the $184,500 wage base in 2026), Medicare tax (1.45%, plus the 0.9% additional Medicare tax on earnings above $200,000), and Federal Unemployment Tax.4Social Security Administration. Contribution and Benefit Base Federal agencies are not permitted to reimburse the employee’s share of Social Security and Medicare taxes on relocation benefits, so RITA addresses income tax only.1eCFR. 41 CFR Part 302-17 – Taxes on Relocation Expenses
How the RITA Calculation Works
RITA is based on the employee’s combined marginal tax rate, meaning federal, state, and local income tax rates stacked together. The agency looks at the taxable relocation benefits reported on the W-2, applies the combined marginal rate, and pays the resulting amount as an additional taxable payment. Because that payment is itself taxable, the calculation has to account for tax on the allowance as well.
The mechanism used across the private sector to solve the same problem is called an inverse gross-up. The employer divides the taxable relocation cost by one minus the combined tax rate. For an employee in a 24% combined bracket receiving $20,000 in relocation benefits, the calculation is $20,000 ÷ (1 − 0.24) = $26,316, so the employer pays about $6,316 on top of the underlying moving costs to cover taxes.
Federal agencies run RITA on either a one-year or two-year cycle. The two-year approach pays a first-year Withholding Tax Allowance based on withholding rates, then reconciles the following year against the employee’s actual marginal rate once the tax return is filed. The one-year approach calculates and pays the allowance in a single year using the employee’s marginal rate.1eCFR. 41 CFR Part 302-17 – Taxes on Relocation Expenses
Withholding on the Relocation Payment
Agencies and employers generally withhold federal income tax on relocation payments at the flat 22% supplemental wage rate. If the employee’s supplemental wages exceed $1 million during the year, the rate on the excess climbs to 37%.5Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide The 22% withholding often understates the actual tax owed by higher earners, which is why the reconciliation step in a RITA calculation matters. Without it, the employee would face a balance at tax time even after receiving an allowance.
Private-Sector Tax Gross-Ups
Private employers don’t use RITA, but many offer a functionally similar payment called a tax gross-up. Approaches vary:
- The inverse method, which produces a mathematically clean gross-up using the combined marginal rate.
- A flat percentage, often 30–35%, added on top of taxable moving expenses. It’s simpler but rarely precise.
- A true-up, where the employer compares the employee’s actual return to a hypothetical return without the relocation income and reimburses the difference.
Any gross-up payment is itself taxable wages, which is why the inverse formula bakes that circularity into the math.
Who Doesn’t Need a RITA-Style Allowance
Two groups keep pre-2018 tax treatment and don’t face taxable relocation income in the first place. Active-duty members of the Armed Forces moving under permanent change of station orders can exclude qualified moving expense reimbursements from income and deduct qualified unreimbursed expenses.6Internal Revenue Service. Topic No. 455, Moving Expenses for Members of the Armed Forces and the Intelligence Community Starting in 2026, P.L. 119-21 extends the same treatment to employees and new appointees of the intelligence community, as defined in the National Security Act of 1947 (50 U.S.C. § 3003), when they relocate because of a change in assignment.2Internal Revenue Service. Employer’s Tax Guide to Fringe Benefits (2026) In both cases, qualified expenses cover household goods, travel, storage, and lodging, but not meals.
For everyone else, employer-paid relocation is fully taxable and an allowance (RITA for federal employees, a gross-up in the private sector) is the only way to blunt the tax hit.
State Tax Considerations
The federal calculation is only part of the picture. A small number of states still follow pre-2018 rules and allow a state-level deduction for qualified moving expenses, which reduces the state tax component of the total burden. States with no income tax remove the state layer entirely. Relocating between two high-tax states that conform to current federal rules produces the largest combined tax hit, and that combined marginal rate is what a properly calculated RITA or gross-up is meant to offset.