One of the most common housing transactions for an older client is to sell a larger principal residence and relocate, for example, to a retirement area. Clients have long deducted many of the costs associated with a move to a new residence when they are relocating for employment purposes. Where the move by the senior can be made to qualify as such a business related move, the tax deductions can be significant. The difficulty arises where the older client has retired and is not working. In such instances, planning for the deductions may be impossible. Where the senior will take on some type of employment at the new location, or has a home-based consulting or other business, planning for these deductions can be worthwhile.
The value of these tax deductions has been an important benefit to employees and self-employed people forced to relocate. The requirements for the various deductions and the categories of costs which can, or cannot, be deducted, are complex. See Form 3903 “Moving Expenses” for guidance.
The following deductions are permitted for moving expenses if your client complies with the requirements discussed below.
Moving household goods (furniture, clothing, dishes, etc.) from the client’s former home to his new home. This can include costs to pack, crate, insure, move, and store (up to 30 days) such household possessions. Other preparation costs, such as disconnecting appliances in preparation of the move, can also be deducted.
The costs of travel to the new location, including lodging, but not meals, are deductible.
Requirements for Deductions: The following requirements must be met in order for moving expenses to be deductible when the client incurs such expenses to move to a location for business purposes:
Distance Test: The distance (measured by the most commonly traveled route) between the location of the client’s new job and the client’s old house has to be at least 50 miles more than the distance from the location of the client’s old job and the client’s old house. The concept is that the client should be moving to obtain a better commute than he or she would have had if he or she stayed in the same house and commuted to his or her new job.
In addition, if the distance between the client’s new place of work and the client’s new residence is greater than the distance between the client’s old residence and the client’s new place of work, the IRS may disallow the deduction under the work connection test described below.
Work Time Test: During the 12 month period immediately after the move, the client must work full time for at least 39 weeks. The 39 weeks of work do not have to be consecutive. The client does not need to have the job before he or she moves. However, if the client does not actually work, no tax deduction will be permitted. If the client becomes self-employed before meeting this test, the client must meet the self-employed test described below.
If the client is self-employed, he or she must also work full time for a minimum of 78 weeks in the 24 month period immediately after the move. A self-employed person is considered to have begun work when substantial arrangements to begin work have been made. If either the client or his spouse meets the appropriate test, and they file a joint federal income tax return (verify this with the client’s accountant), the client may qualify to deduct moving expenses. The clients can add together the time spent working at different jobs to meet these requirements.
Special exceptions permit the client to waive these requirements if the client is disabled or dies, or if the client is separated from his or her job for a reason other than willful misconduct. Specifically, if a client who moved in connection with the start of work at a new location dies before satisfying the 39- or 78-week test for deducting moving expenses, the 39- or 78-week test is not applicable. Code Sec. 217(d)(1)(A).
Work Connection Test: The move must be connected with the client’s starting work at his or her new principal place of work. The move must be reasonably proximate in both time and place to the commencement of the client’s new job. A new principal place of work is defined for an employee as the plant, office, shop, store, or other property where services are performed. For a self employed person, it is defined as the center of his or her business activities. The principal place of work of someone employed by a number of employers on a short term basis through an employment agency is the employment agency. The moving expenses must be incurred within one year from the date the client first starts his new job, unless he can demonstrate extenuating circumstances.
Reasonableness Test: Only reasonable expenses may be deducted. For example, travel expenses should be deemed reasonable if they are incurred along the shortest and most direct route from the client’s old home to the client’s new home. Costs to travel a longer but more scenic route, or to permit a stopover, are not allowable deductions.
How to Claim Moving Expense Deductions: The client applies moving expenses as a deduction to arrive at adjusted gross income (“AGI”) on his or her federal income tax return, Form 1040. For some clients, a deduction from AGI may provide additional benefit since reducing AGI minimizes other tax costs. For example, the increased tax on Social Security is based on a modified version of the client’s adjusted gross income. Reducing adjusted gross income may therefore reduce the amount of Social Security taxed. This provides an added incentive for the older client to attempt to qualify for the moving expense deduction.
If the client’s employer reimburses the client for moving expenses, the employer’s reimbursement is excluded from the employee’s income.
Subscribe to our email list to receive information on consumer webcasts and blogs, for practical legal information in simple English, delivered to your inbox. For more professional driven information, please visit Shenkman Law to subscribe.