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Some people think you can always deduct moving expenses on your federal income tax return. Not true. However, you can deduct some moving expenses if you meet the applicable eligibility rules.
Good News, Bad News
The good news is allowable moving expense write-offs are "above-the-line" deductions. As such, you don't have to itemize these costs on your tax return to benefit.
And the bad news? Your move must be considered work-related for you to be entitled to any deductions.
The 50-Mile Test
To meet the work-related requirement, you must first pass the 50-mile test. This means the distance between your new primary job and your former home must be at least 50 miles greater than the distance from your former home to your old job (in other words, your old commute).
So if you formerly lived 10 miles from work, and your new office is 45 miles from your former home, you lose. You can't deduct your moving expenses. If, on the other hand, your new office is 65 miles from your former home, then your new commute is 55 miles longer, and you pass the first test.
The 39-Week Test
The second test is intended to prove that you moved for work-related reasons and not just for a change of scenery. To pass, you must be employed full time in the general area of your new job location for at least 39 weeks during the 12 months after you make the move. You're allowed to switch jobs as often as you like during the 12-month period — as long as all the jobs are in the same general area as the first job.
Rules for Business Owners
The rules are slightly different for business owners. If you're a sole proprietor, partner or member of a limited liability company, you can simply transfer yourself and claim a moving expense deduction. But you still must pass the aforementioned 50-mile and 39-week tests, as well as a third test that applies to self-employed folks. The third test requires that you work full time in the new area for at least 78 weeks during the 24 months after you move.
Entering or Rejoining the Workforce
If you've been out of the workforce, or have worked only part-time for a "substantial" period, you can claim a moving expense deduction when entering or rejoining the full-time workforce. (Note: The IRS doesn't clearly define "substantial.")
To qualify, your new job and your former residence must be at least 50 miles apart. In addition, you must pass the aforementioned 39-week test.
If You're Married
For a married joint-filing couple, only one spouse must pass the applicable tests to qualify for a moving expense deduction on the couple's joint return. For example, say your job is five miles from your current home, and your spouse is self-employed and works out of an office in the home. If you take a new job at a location 40 miles away from your current home, you'll either be faced with a long commute or a nondeductible move.
But if you move 50 or more miles away from your current home, you can claim a moving expense deduction because your self-employed spouse passes the 50-mile test. The only remaining requirements are that your spouse must also pass the 39-week and 78-week tests.
Allowances and Restrictions
The moving expense deduction can be significant because of the variety of items you're allowed to claim. That is, you can deduct the cost of packing and shipping your possessions — including insurance and up to 30 days of storage. You may also write off the cost of traveling once to your new home, which includes lodging but not meals.
If you drive, you can deduct actual driving costs (such as gas and oil) or a standard cents-per-mile amount. What's more, you can write off the cost of disconnecting utilities at your old home and hooking up the ones at the new home.
Of course, there are restrictions. And, sadly, the list of what's not allowed is much longer. You can't deduct expenses incurred buying or selling a home or acquiring or breaking a lease. You also can't deduct:
Years ago, you could deduct house-hunting expenses, but that's no longer the case under current rules.
If you get reimbursed for some or all of your moving expenses, you're not allowed to deduct costs paid by your employer. There are two ways for an employer to pay moving costs:
1. Grant tax-free reimbursements for expenses that employees could have deducted if they'd paid the costs themselves, or
2. Add reimbursements directly to employees' taxable salaries.
If your employer gives you tax-free reimbursements, you don't have to do anything. In effect, your allowable moving expenses have already been deducted because the reimbursements to cover those costs weren't included in your taxable salary. The total amount of tax-free reimbursements will show up as a miscellaneous nontaxable item on the Form W-2 that you'll receive from your employer shortly after year end.
If your employer adds moving expense reimbursements to your taxable salary, you can claim the deduction on your return. But you can deduct only what the tax law allows (under the rules explained above). So, if your employer generously pays for things such as meals and temporary housing while you wait to move into a new home, you'll have to pay income tax on that extra money.
There's one accounting oddity that you should be aware of, because it can save you time and money. Say your employer agrees to cut you a check covering your moving expenses before you actually hit the road. What happens if you get the check in November or December and don't move until the next year? Do you have to pay taxes on the money in the first year, then deduct your allowable moving expenses in the second year?
The short answer is: No. In a rare exception to standard tax accounting rules, you can deduct your allowable moving expenses in the year you receive the reimbursements — even if the move doesn't actually happen until the next year.
Too Valuable to Ignore
Moving entails so many logistical challenges that it may be tempting to ignore the tax impact of the journey. Yet the financial benefits of these deductions make them worth the effort. So, once you've rounded up all your deductible expenses, work with your tax adviser to successfully claim them on your return.