Tax Implications of Moving Expense

Sorting out the tax implications of moving expenses can often rival unpacking as a point of confusion. One difficulty is separating personal, nonmoving expenditures from deductible moving expenses; another is figuring out what portion of any reimbursement of moving expenses from an employer is taxable; and still another is trying to separate the "old" rules from current law in place only relatively recently - since 1997. This memo highlights some of the more often-missed rules.

 
Time and distance tests. Generally, moving expenses are deductible only if closely-related both in time and place to the start of work at a new job location. 

• "Closely-related in time" generally means that all expenses must be incurred within one year of first reporting to work at a new location. An acceptable exception to this rule exists for taxpayers who can prove that circumstances existed that prevented the move within that time. The IRS gives as an example a family that delayed the move for 18 months to allow a child to complete high school.

• A "second time" test also must be met. If the taxpayer is an employee, the taxpayer must work full time for at least 39 weeks during the first 12 months after arriving in the new general area. Self-employed taxpayers not only must work full time for at least 39 weeks during the first 12 months, but must also work full time for a total of at least 78 weeks during the first 24 months after arriving at the new location. The definition of full-time work depends on what is usual for the type of work the taxpayer does in the taxpayer's work area (for example, a dentist working four days a week is acceptable to the IRS). 

• The "closely-related in place" requirement has two parts: (1) the distance from the new home to the new job location is not more than the distance from the former home to the new job location (or moving is a condition of employment; or commuting time costs less in time or money from the new home to the new job); and (2) the new job location is at least 50 miles farther from the former home than the old main job was from the former home. 

What is deductible? All moving expenses are not deductible; only those that are specified under the Internal Revenue Code and regulations qualify. Under these rules, reasonable costs related to moving household goods and personal effects qualify, but the extra costs of fitting windows for new curtains, hunting for a private school, or selling a residence, for example, do not. Some further distinctions that the IRS has drawn on what is deductible include: 

• the cost of storing and insuring household goods and personal effects only within any period of 30 consecutive days is deductible; 

• the cost of moving possessions from another location (for example, a summer home that is also being sold) can qualify, but only to the extent of what it would cost to ship from the principal home; 

• the cost of moving furniture bought on the way to the new home is not deductible (but the cost of moving furniture purchased and delivered before the movers come is deductible). 

• The cost of traveling from the old home to the new home by the most direct route is also deductible. Traps in deducting this expense include: 

• The standard mileage rate for travel by car is only 12 cents/mile in 2003 (13 cents/mile in 2002), not the business rate of 36 cents (36.5 cents in 2002). 

• The IRS says that lodging expenses can include staying in a hotel at the location of the old residence within one day of the furniture being moved out, and expenses on the day the taxpayer arrives at the new location. 

Employer reimbursements. Under the Internal Revenue Code, gross income does not include any working condition fringe benefit classified as a qualified moving expense reimbursement (i.e., expenses that would otherwise be deductible under Internal Revenue Code Section 217). Reimbursed expenses that are not otherwise deductible are included in the employee's income. However, employers often gross up the amount of reimbursement to cover the employee's additional income tax liability. Nevertheless, such amounts must still be reported in total on the employee's return. 

If you have any questions about how any of the above-mentioned items, or any other consideration, may directly impact on your move, please do not hesitate to call. 

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