Americans have always been a restless bunch, which may be why the Internal Revenue Service can be pretty generous when it comes to letting you deduct work-related moving expenses. That doesn't mean it makes it easy.
Pass or Fail
The best thing about writing off your moving expenses is that the deduction is taken "above the line," meaning you don't have to worry about all those itemized deduction phaseout rules that can quickly dash your hopes of a big tax refund. The worst thing about the rules is that Congress has made them tougher over the past several years.
To determine who qualifies for the deduction, the IRS has set up two tests. Pass them and you can cash in; fail and you have to eat all the costs of your move. Keep in mind, the IRS lets you take this deduction only if you are moving because of a job. And it doesn't matter if it's a new job, the same job or your first job. (Recent college grads, take note.)
Your first challenge will be to pass the 50-mile test. That means the distance between your new primary job and your former home must be at least 50 miles greater than your old commute. (The distance used to be 35 miles, but Congress upped it as part of one of its recent budget-balancing acts.) So if you lived 10 miles from work and your new office is 45 miles from your old home, you lose. You can't deduct your moving expenses. If, on the other hand, your new office is 65 miles from your old home, then your new commute is 55 miles longer and you pass the first test.
The second test was designed to prove that you moved for work and not just for a change of scenery. It requires that you 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. This means you are allowed to switch jobs as often as you'd like after the move. And if your employer transfers you again or even lays you off, the IRS won't hold it against you and will waive the 39-week test.
The rules are slightly different (and more beneficial) if you own your own business, or if you have been out of the workforce or worked part time for a "substantial" period of time. (The IRS doesn't define "substantial.") If you're a sole proprietor or a partner, you can just transfer yourself (to Honolulu, perhaps) and deduct the cost, as long as you meet the 50-mile and 39-week tests as well as a third test that applies to self-employed people. This third test requires that you work full time in that area for at least 78 weeks during the 24 months after you move.
If you're just reentering the full-time workforce, you can claim the deduction even if you don't have a job when you move. But your new job and your former residence have to be at least 50 miles apart, and you must still pass the 39-week test.
If you're a married couple filing jointly, only one spouse needs to meet both the time and distance tests. And here's a case where a couple of miles can make a big difference come tax time. Say there's a couple in which the wife works for a company five miles from home and the husband is self-employed and works at home. If the wife is transferred or finds a new job at an office 40 miles away from home, she will either be stuck with a long commute or the couple will have a nondeductible move. But if they moved 50 or more miles from their current house, then they could claim the moving deduction because of the husband's self-employed status. The only requirement is that the husband meet the 39-week and 78-week rules.
This trick also works if one spouse is transferred and tries to put off the misery of moving by enduring the misery of commuting for a year or more. Under normal circumstances, he or she can deduct only moving expenses that occur within one year of the new job's start date, so the transferred spouse will lose out on the tax deduction. But the other spouse can save the day by taking a job at the new location or, if he or she is self-employed, by simply moving the business to the new location.
What's It Worth?
You've passed all the tests, and now it's time to tally up your winnings. The moving deduction can be significant, but the IRS has become somewhat less generous recently.
Now you're limited to the following: the cost of packing and shipping your possessions, including insurance and up to 30 days of storage; the cost of traveling to your new home (once), including lodging but not meals (you can also deduct your actual driving costs, like gas and oil, or a whopping 15 cents a mile for 2005 -- compared with 14 cents for 2004 -- for the drive); and finally, the cost of disconnecting utilities at your old home and hookups at the new home.
Sadly, the list of what's not allowed is much longer. It includes expenses incurred buying or selling a home or acquiring or breaking a lease, apartment security deposits, losses from selling or giving up club memberships, and driver's-license and car-registration fees. In the past you could have deducted expenses incurred while you were out house hunting, but no more.
Remember, though, if any of these items is used for business, you might be able to deduct some of these amounts as business expenses.
Once you have rounded up all your deductible expenses, complete IRS Form 3903 (Moving Expenses), which is relatively straightforward as far as tax forms go. The resulting writeoff shows up on page one of your 1040.
Your Generous Boss
If you get reimbursed for some or all of your moving expenses, don't get too greedy and try to double dip. You're not allowed to deduct moving costs if they are paid by your employer.
There are two ways for your company to pay your moving costs. It can give you tax-free reimbursements for the amounts you could have deducted yourself (see list above), or it can add the reimbursement to your salary.
If your employer gives you a tax-free reimbursement, your job is pretty easy. Do nothing. The expenses have already been effectively deducted because the reimbursement was not included in your wages. The amount of the reimbursement will show up as a miscellaneous nontaxable item on the W-2 form that your employer sends you, and you won't have to fill out any extra tax forms.
If your employer simply adds the reimbursement of your moving expenses to your salary, then you have to fill out Form 3903 to get your deduction. The same is true if you're self-employed. You'll be able to deduct only what the IRS allows, no matter how much your employer gives you. So if your boss is more generous than the IRS and pays for things like meals and temporary housing while you wait to move into your new home, then you will have to pay income tax on that money.
How do you know if your boss is being generous? Usually you fill out a form at work detailing your expenses, and your employer calculates what is deductible.
There is one accounting oddity involving moving that you should be aware of, because it can save you time and money. Often your employer will give you a check to cover your moving expenses before you actually hit the road. But what happens if you get the check in December and move in January? Do you have to pay taxes on the money in the first year, then deduct your moving expenses in the second? No. In a rare exception to standard tax accounting rules, you can deduct your move in the year you receive the reimbursement, even if the move takes place in the next tax year.
So in this case, my advice is to hold off filing your taxes until you complete your move. If you haven't moved by April 15, then you should file for extensions until you are safely settled in your new home and can account for all your allowable moving expenses.