Tax Deduction on Moving Expense

Table of Contents
Executive Summary 3
Moving Expenses 4 What is a Moving Expense? 4 Conditions Needed to Deduct Moving Expenses 5-6 What can we Deduct? 6 Reimbursement and Withholdings 7 How to Report Moving Expenses 8
Works Cited 10
Executive Summary The process of deducting moving expenses is long and contains many conditions such as the time test, the distance test, and closely related to work condition. Therefore, some mistakes may easily be made along the way, such as deciding whether or not to include reimbursement as income or as an expense, and if it is counted as income. The employer has the responsibility to withhold tax from the reimbursement, unless the move was solely for the benefit of the employer, not as compensation for the employee, only the personal expenses such as meals and lodging is counted in income. Also expenses must be deemed reasonable so one must watch out account for expenses only related to the trip, not sightseeing detours. Therefore, one must take great care when handling moving expenses, because it might become a deduction, or a determination of income.

Tax Deduction: Moving Expense

When we graduate from xxxx, we will get a new job in another city or state. The good news is that we may be able to list our moving expenses tax deductable on our itemized tax forms if we meet certain qualifications. Although there are many expenses we can deduct, there are even more expenses that we cannot be deducted. Now, to fully understand the value of these tax deductions has been an important benefit to us.

First of all, we should figure out the definition of moving expenses. “In the case of some fringe benefits that are offered to or given to employees, certain benefits can be excluded from an employee’s income because the expenses would normally be deductible on an individual’s personal income tax return. A moving or relocation expense is one such benefit.” (www.groco.com). When we get a new job offer and have to move to a new place, we can deduct some of the relocation expenses in our personal income tax return. And we always fill Form 3903 to deduct certain qualified moving expenses.

We can reimburse any type of moving expenses as long as the employer is willing to pay for the bill, or even get the relocation fee as an advance payment from the new employer. But we cannot deduct all the moving expenses in our personal income tax return. Only the qualified ones can be excluded from our tax return. To deduct the moving expenses correctly, we should make clearly what is “qualified”. Here comes the question: Who can deduct Moving Expenses?

According to IRS code, “You can deduct your moving expenses if you meet all three of the following requirements:

● Your move is closely related to the start of work.

● You meet the distance test.

● You meet the time test” (www.irs.gov).

The IRS code prescribe that your move is closely related to the start of work, not only in time but also in place. If you want your moving expenses be “qualified”, you have to move to your new job location not less than 12 months. This rule is not limited to your family member, but only lies on your personal move. If you move to your new job location more than 12 months of the date you started to work and you still want to deduct your moving expenses, you must show a valid reason why you delayed your move for more than 12 months. The distance from your new house to your new job location is also very important. This distance must not be more than the distance from your old house to your new job location. This means that your new house must closely near your new job location than your old house. If you cannot meet the distance requirement, you may still deduct your moving expenses if you satisfy either one or both conditions: “You are required to live at your new home as a condition of employment or you will spend less time or money commuting from your new home to your new job location” (www.irs.gov).

The distance test is another qualification for you to justify whether or not you can deduct your moving expenses. This test differs from the “closely related distance” requirement we talked about earlier, the distance test requires that your new job location must be at least 50 miles farther from your old house than your old job location. This test emphasizes at least “50 miles farther”, and if you want to be qualified, you must definitely move at least fifty miles further from your old house to start work at the new job location. And when you calculate the distance, you must use the shortest route to have a more reliable number. You can notice that, the distance test only takes into account the location of your old house. It does not consider your new home location. This is also dissimilar to the closely related distance requirement we talked earlier.

The third qualification test is time test. The time test is different for full time employees and self-employed individuals. “If you are an employee, you must work full time for at least 39 weeks during the first 12 months after you arrive in the general area of your new job location (39-week test).” “If you are self-employed, you must work full time for at least 39 weeks during the first 12 months and for a total of at least 78 weeks during the first 24 months after you arrive in the general area of your new job location (78-week test)” (www.irs.gov). If you meet neither of the two requirements, do not worry, you still have the chance to deduct your moving expenses. You can deduct your moving expenses if you are sure that you can meet the 39-week test or 78-week test in the following year. But if unfortunately, you fail to meet the test in the following year, and then you have to report the moving expenses deduction as other income in the following year. You must report the real situation of your own honestly.

Once one figures out that they can deduct moving expenses, then they have the tasks of figuring out which expenses can be deducted. By definition, one can deduct expenses that are reasonable, such as “moving household goods and personal effects (including in-transit or foreign- move storage expenses), and traveling (including lodging but not meals) to your new home” (www.irs.gov). The expenses that are deemed reasonable are the costs of traveling by car- where one can deduct their actual expenses or the standard mileage rate of twenty-four cents per mile- packing and transporting personal items from one the old home to the new home, storing household goods within thirty days after one moves to their new home and before they are delivered to the home.

Also, employers have reimbursement plans to cover travel expenses which must be reported as income. There are two types of reimbursement plans- accountable and non-accountable. Under the plans, employers require he employee to keep an adequate record of all expenses and documentation incurred during the move. The documentation and expenses must be reported to the employer “…within a reasonable period of time” which basically means that one gets an advance within thirty days of the time of expense, the expenses are accounted for within 60 of when they were incurred, any excess reimbursement is returned within 120 days they were paid, and one is given a statement that asks to comply with these rules (www.irs.gov). Under non-accountable plans, the reimbursement does not meet the rules under the accountable plans and includes any excess payments must be returned to the employer and reimbursement of nondeductible expenses such as car tags, drivers license, etc. All reimbursements must be treated as income in the W-2.

In addition to having to report it as income, the employer must withhold taxes, social security, and allowances paid in one’s reimbursement. Let us take a look at one case, Humble Oil Refining Company v. The United States. Humble Oil Refining Company had reimbursed their employees for moving from New York to their Houston, and the company did not withhold taxes from the reimbursements, and therefore, suffered a fine of $500,353.04 plus interest. The company said in their defense that the “…reimbursements and payments in question do not constitute remuneration ’for services performed’…no service was to be performed by plaintiff’s employees in order to obtain these reimbursements, unless it be the act of physically moving from one permanent job location to another at the plaintiff’s request…”(Kluwer 1). Because of the court case, Ritter v. United States, supra, these reimbursements are consider a part of wages, therefore, it is considered a part of income, and thus subject to withholding taxes. Yet because the company was able to prove that the reimbursements were in fact distributed to the convenience and benefit to the employer, not as compensation to the employees, this counted as an expense for the employer, but “…the costs of meals, lodgings, and expenses incidental to securing housing…are personal living expenses of the employee, and if they are provided by the employer, income is realized thereby” (Kluwer 4). The outcome of the case was that the company had no idea that they were paying their employees’ wages, therefore should not have to pay the taxes and interest. This case shows that not always is moving expenses included in income, but anything that is the personal living expenses should be reported as income.

After deciding what to deduct, one must use form 3903 to calculate the deduction. Yet, there are certain situations which do not require this form. These are “You moved to a location outside the United States in and earlier year. You are claiming only storage fees while you were away from the United State. Any amount your employer paid for the storage fees is included as wages in box 1 of your Form W-2” (www.irs.gov). After calculating your expenses compared with your deduction, if your expenses are greater that your reimbursement then that amount is your deduction, vice versa, if your reimbursement is greater than your expenses, then the excess must be included in income. One’s expenses can be deducted depending if they are reimbursed or not. If they are reimbursed, then one can deduct either in the year one incurs the expenses, or in the year one receives the reimbursement. If the expenses are not reimbursed, then one can deduct the expenses in the year the expense was paid or incurred.

It is very important for us to learn about the definition, qualification and process of deducting moving expenses. We will not miss the benefit that these hiring companies provide to us. We should especially learn how to correctly calculate these deductable moving expenses following IRS code because understanding of tax laws and the proper use will help us save money and avoid a loss.

Works Cited

Ditmer, Robert W. “Qualified Moving Expenses”

• Kluwer, Wolters. “Humble Oil & Refining Company v. The United States. , Withholding

of taxes on wages: Reimbursed moving expenses: Existing employees: New

employees(June 05,1970), U.S. Court of Federal Claims, (Jun. 5, 1970)

• “Publication 521 Cat. No. 15040E Introduction”