Life Events & Tax Planning – Part VI: Moving for Employment
It goes without saying that there is a long list of items to consider when you make the decision to move. Moving—especially if it’s for a job—is a notable life event that brings with it a number of tax consequences, so it’s important to know the facts ahead of time. One benefit of relocating for employment is that some of your moving expenses might qualify as deductions that can be taken on your tax returns. For moving expenses to qualify as a tax deduction, they must meet both sets of criteria in what the Internal Revenue Service calls the “distance” and “time” tests.
THE DISTANCE TEST – For moving expenses resulting from job-related relocation to qualify as a tax deduction, the distance between the taxpayer’s former home and the new place of work must be at least 50 miles farther than the distance between his or her former home and the old place of work.
THE TIME TEST – The taxpayer must work full time for a minimum of 39 weeks, for the first year after the move for the related moving expenses to qualify as a tax deduction.
Note that for taxpayers who are self-employed, the distance test remains the same, but the time test specifies that the taxpayer must work at least 78 weeks over the first two years after the move.
DEDUCTIBLE MOVING EXPENSES
If you meet the above requirements, you can deduct certain expenses related to your move, including:
TRAVEL TO NEW HOME
Qualified travel costs include lodging during the move for the taxpayer and his or her family. If you use a car, you can deduct actual expenses such as gas and oil, or you can deduct the standard mileage rate of 19 cents-per-mile (down from 23 cents-per-mile in years prior to 2016). Parking fees and tolls are also typically included as deductible travel costs if paid during the move.
The taxpayer can also deduct the cost of storing and/or insuring household and personal items within any period of 30 consecutive days after those items are moved out of the old home.
The cost of packing, crating and shipping to the new home your personal items, car, and/or pets can also be deducted as a moving expense.
NONDEDUCTIBLE MOVING EXPENSES:
Although there are other costs associated with moving, not all qualify as tax deductible moving expenses. The following are not qualified moving expenses that can be deducted on your tax return:
- Loss on the sale of your former home
- Home improvements to help you sell your former home
- Cost of new driver’s license
- Additional return trips to your former home
- Pre-move house-hunting expenses
REPORTING YOUR MOVING EXPENSES
IRS Form 3903, “Moving Expenses,” is the form you will be required to complete for the reporting of all qualified moving expenses. Be sure to include all transportation, travel, and storage costs associated with your relocation on this form. If your employer reimburses you for qualified deductible moving expenses in Box 1 of your Form W-2 (Wages), you can claim those expenses on your tax return. If, however, the expenses your employer reimburses you for are nondeductible, you will be required to report them as income on your tax returns and pay the required tax. Additionally, if a new employer pays for any expenses not included in Box 1 of your Form W-2 (Wages) (for example, if shown in Box 12 of Form W-2 with Code P), the payment amount must be reported on Line 4 of Form 3903.
If an individual resides in more than one state in the U.S. within the tax year, he or she may be subject to income taxes in a former home state, and part-year tax returns might need to be filed. When required, part-year returns are prepared using the total income from all states, and are then pro-rated based on the amount of income earned in each state. Additionally, if the individual continues to make income sourced to a state in which he or she no longer lives, non-resident state tax returns might be required in subsequent years.
If moving outside of the U.S. for work, similar moving expenses to those for domestic relocation can be deducted. However, if a taxpayer is able to exclude part or all of the income earned in a foreign country from his or her tax return, the moving expenses related to that job cannot be claimed. For more on expatriation considerations for U.S. citizens moving abroad, please refer to one of our previous blogs, “Understanding the Tax Costs Before You Expatriate.”
As with any major life change, it is important to have checklists in place and do your research well before your move takes place to ensure you fully understand all relevant risks and benefits related to your finances, taxes, and overall wellbeing. You should remember to take care of all necessary applications and paperwork associated with relocating. This includes, but is not limited to, updating your car registration, driver’s license information, mailing address, and voter registration. You should also be diligent about maintaining thorough records of all expenses, statements, employer reimbursements and other information relevant to your move.
This blog series is meant to provide an overview of the common implications you might face when you encounter various life events, but there are likely additional considerations dependent on your specific scenario. At FF&F our experienced staff will act as your advisors throughout each step of any event that might affect your tax planning. For more information on this topic, or to discuss tax planning strategies, please contact us at firstname.lastname@example.org or (212) 245-5900.
John Gontijo, CPA, MBA, is a Tax Manager at Farkouh, Furman & Faccio. He has over 10 years of experience with high net worth individuals, small businesses, and international taxation. Prior to joining FF&F, he worked for a niche CPA firm in NYC which specialized in inbound U.S. tax matters for German, Swiss, and Austrian clients, including Offshore Voluntary Disclosure Programs.