(This is Part 3 of an eight-part series. See Part 1: Recent changes to the $250,000 home-sale tax exemption; Part 2: Personal-use time determines vacation-home tax break; Part 4: Homeowners take refuge in casualty loss assistance; Part 5: Real estate investing generates big tax benefits; Part 6: Tax savings abound with real estate exchanges; Part 7: Home-business expenses add up to tax savings and Part 8: 10 most often overlooked real estate tax deductions.)
Were you one of the more than 25 million homeowners and renters who changed residences in 2004? Did you know your moving costs might be tax deductible?
However, to qualify you must also have changed your job location. It doesn’t matter if you changed employers, stayed with the same employer, or became self-employed.
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A special benefit of the moving cost tax deduction is it is an “adjustment” or subtraction from your gross taxable income rather than an itemized deduction. The tax result is, even if you don’t itemize your personal tax deductions, your moving costs can produce a deduction tax saving of hundreds, maybe even thousands, of income tax dollars.
THE IMPORTANT JOB RELOCATION TEST. To qualify for the moving cost tax deduction, your new job location must be at least 50 miles further from your old home than was your previous work site. The distance from your new job site to your new residence doesn’t matter.
For example, suppose you drove four miles from your former home to your old job location. To qualify for the moving expense tax deduction, your new job site must be at least 50 miles further away. That’s four miles plus 50 miles or 54 miles in this example.
THE WORK TIME TEST. If you passed the first moving expense deduction distance test, your second (and last) test involves the length of your work time at or in the vicinity of your new job location.
To pass this second test, you can change jobs, location, and even employer. But you must stay in the vicinity and work full-time at least 39 weeks during the 52 weeks after your residence move. Part-time employment doesn’t count. But either spouse can qualify to meet this test.
Time spent searching for employment doesn’t count. The obvious reason for this test is to prevent frequent tax-deductible moves, such as moving to sunny Florida in the winter and moving to cool Minnesota or Alaska in the summer.
However, if you are self-employed, the test is more difficult. You must work at least 78 weeks full-time in the vicinity of your new job location during the 104 weeks after your residence move.
The reason for this rule is it prevents self-employed students and hobbyists from deducting their moving costs even though they only work a few hours each week. But these work-time tests are waived for disability, job layoffs, and the taxpayer’s death.
WHAT IF YOU DON’T MEET THE WORK TIME TEST BY APRIL 15, 2005? If you meet the 50-mile additional job distance test, but have not yet met the 39-week or 78-week work time test by April 15, 2005, when your income tax returns are due, you have a choice.
You can claim the moving cost deduction on your 2004 income tax returns, but amend your returns later if you don’t meet the time test. Or, you can file your 2004 income tax returns without the moving cost deduction and later amend your tax returns to claim it when you meet the time test.
Most tax advisers suggest taking the moving cost deduction if you meet the 50-mile distance test so you won’t forget, but later amending your tax returns if the time test is not met.
Use IRS Form 3903 to calculate your moving cost deductions and attach it to your income tax returns. Since members of the armed services are exempt from the 50-mile and 39-week work tests, they should note this on their Form 3903.
NO LIMIT TO DIRECT MOVING-COST DEDUCTIONS. Your actual direct moving expenses, such as hiring a moving van, shipping your pets, in-transit storage costs up to 30 days, moving insurance, and costs of transporting your “personal effects” such as your horse, boat, and recreational vehicle are deductible without maximum limit.
If you drive from your old to your new residence, you can deduct actual out-of-pocket costs, such as gasoline and oil, but not repairs and depreciation. Or, you can deduct 14 cents per mile for 2004 moves, plus parking and tolls. The IRS recently increased this allowance to 15 cents per mile for residential moves in 2005.
INDIRECT MOVING COSTS ARE NOT DEDUCTIBLE. When an indirect moving expense is not part of the residence change, it is not deductible. Examples of non-deductible indirect moving expenses are pre-move inspection trip fares, meals and lodging.
Costs for moving your chauffeur, nurse, nanny, butler, cook and maid are also nondeductible indirect moving costs.
If your employer reimbursed you for indirect moving expenses, the reimbursement is taxable income to you. For this reason, it is better to have your employer pay any indirect moving costs rather than reimbursing you and raising your taxable income without a corresponding moving cost deduction.
EMPLOYER REIMBURSEMENTS AFFECT YOUR MOVING-COST DEDUCTIONS. If your employer reimbursed your direct moving cost bills, you have no additional taxable income since the extra payment is offset by your moving cost deduction.
However, if your employer reimbursed you a flat moving expense allowance, the excess income more than your direct deductible moving costs is taxable to you. Of course, when an employer pays for non-deductible expenses, such as loss on the sale of a home or for non-deductible house-hunting trips, such amounts are taxable income to the employee.
If you are in the armed forces, special moving cost reimbursement rules apply. Your gross income generally will not include moving and storage reimbursements or allowances for permanent change of duty station, and for expenses incurred by spouses and dependents. But reimbursements exceeding actual moving expenses are taxable to the service member. For full details on moving cost deductions, please consult your tax adviser.
Next week: 2004 was a big year for deductible casualty losses.
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