Tax-Smart Strategies for Moving

Key Takeaways:

  • Understand Moving Expense Deductions: While the Tax Cuts and Jobs Act (TCJA) suspended moving expense deductions for most taxpayers until 2025, members of the Armed Forces may still qualify.

  • Keep Meticulous Records: Save all receipts and documentation related to your move, as some expenses might qualify for deductions on state returns or future tax law changes.
  • Consider the Tax Implications of Residency: Be aware of how changing your state or country of residence can affect your tax rates, credits, and liability.

    Moving can be a significant life event that not only requires logistical planning but also an understanding of the tax implications that come with it. As tax laws evolve, it’s crucial to stay informed about how these changes may affect the deductions and credits available to you. The Tax Cuts and Jobs Act (TCJA) of 2017 brought about significant changes to moving-related deductions, impacting many taxpayers. By planning your move with tax efficiency in mind, you can potentially save money and avoid surprises come tax season.

    As an expert CPA firm, we aim to provide you with a layman-friendly overview of the tax implications of moving, ensuring you’re equipped with the knowledge to make informed decisions.

    Current State of Moving Expense Deductions

    The TCJA has altered the landscape for moving expense deductions significantly. Prior to the TCJA, many taxpayers could deduct moving expenses related to a job relocation, provided they met certain distance and time tests. However, from 2018 through 2025, the deduction for moving expenses has been suspended for non-military taxpayers. This means that most individuals cannot claim moving expenses as a deduction during this period.

    Qualifications for Deducting Moving Expenses for Military

    Despite the suspension of moving expense deductions for the general public, active-duty members of the Armed Forces can still deduct certain moving expenses. To qualify, the move must be due to a military order and related to a permanent change of station. Eligible expenses include the cost of moving household goods and personal effects, as well as travel costs to the new location (excluding meals). Understanding these criteria is essential for military personnel seeking to take advantage of this tax benefit.

    Example: Captain Sarah Johnson, an active-duty member of the Armed Forces, received orders for a permanent change of station from California to Virginia. Due to these orders, Sarah qualified to deduct her moving expenses. She kept detailed records of the costs incurred in moving her household goods and personal effects, as well as her travel expenses to the new location, excluding meals. By understanding the criteria for deducting moving expenses as a military member, Sarah was able to take advantage of this tax benefit, reducing her overall tax liability for the year.

    Documenting Your Move

    Maintaining thorough records is key when it comes to documenting your move for tax purposes. You should keep a comprehensive list of all moving-related expenses, including but not limited to moving company invoices, transportation tickets, temporary lodging receipts, and any other costs directly related to your move. This documentation is particularly important for military personnel who are still eligible for moving expense deductions.

    Storing Documents for Tax Purposes

    For tax purposes, it’s best to organize and store all receipts and records related to your move. Create a dedicated file for these documents, and consider digital backups for added security. Keeping these records in order is not only helpful for potential deductions but also for substantiating expenses if ever questioned by the IRS.

    Example: When Scott moved from New York to Texas for a new job, he made sure to organize and store all his receipts and records related to the move. He created a dedicated file for these documents and scanned them for digital backups. This meticulous record-keeping helped Scott keep track of his moving expenses and provided a clear, organized record in case the IRS ever questioned his deductions. By being diligent about storing his documents, Scott ensured he could substantiate his expenses and take advantage of any potential tax benefits.

    Tax Residency and Domicile Considerations

    When you move, especially across state lines or internationally, you may need to establish a new tax residency. Each state has its own rules for determining tax residency, often based on the amount of time you spend there or the location of your permanent home. It’s important to understand these rules to ensure compliance and optimize your tax situation.

    Dual-State Residency and Tax Filings

    Navigating tax obligations in multiple states can be complex. If you have dual-state residency, you may be required to file tax returns in both states, which could lead to double taxation if not managed correctly. Understanding the credits and deductions available for taxes paid to other states is crucial in these situations.

    Example: After relocating from California to Oregon for work, Jennifer found herself dealing with dual-state residency for the tax year. She had to file tax returns in both states, which initially seemed daunting. However, Jennifer learned about the credits available for taxes paid to the other state, which helped mitigate the risk of double taxation. By carefully tracking her income earned in each state and applying for the appropriate credits and deductions, Jennifer managed her dual-state tax obligations efficiently, ensuring she only paid her fair share of taxes without being double-taxed.

    International Moves and U.S. Taxes

    For those moving abroad, the U.S. tax system still requires you to report worldwide income. However, you may qualify for the Foreign Earned Income Exclusion, which allows you to exclude a certain amount of your foreign earnings from U.S. tax. Additionally, tax treaties between the U.S. and other countries can affect your tax obligations and provide relief from double taxation.

    Example: When Kevin moved to France for a new job, he quickly learned that he still needed to report his worldwide income to the U.S. tax authorities. Fortunately, Kevin qualified for the Foreign Earned Income Exclusion, allowing him to exclude a portion of his foreign earnings from U.S. taxes. Additionally, he researched the tax treaty between the U.S. and France, which provided further relief from double taxation. By understanding these provisions, Kevin was able to navigate his tax obligations effectively and avoid paying taxes on the same income in both countries.

    Employer Reimbursements for Moving

    Employer reimbursements for moving expenses can be either taxable or non-taxable. Under the TCJA, most moving expense reimbursements are considered taxable income. However, for military members, reimbursements may still be excludable from income. When negotiating your relocation package, consider the tax implications and strive for a tax-efficient structure, such as having the employer directly pay for moving services.

    Final Thoughts

    When planning a move, it’s important to consider state-specific tax laws, as they can vary widely and impact your overall tax liability. Additionally, the IRS provides resources that can help you understand the tax aspects of moving and changes in residency. For complex interstate and international moves, seeking professional tax advice is highly recommended to navigate the various rules and regulations.

    IRS References

    • Moving Expenses for Military: For active-duty military members, IRS Publication 3, Armed Forces’ Tax Guide, provides detailed information on the moving expense deduction and other tax benefits available to service members.

    • Tax Residency Rules: If you’re moving to or from the United States, IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, offers guidance on tax residency rules and how to file taxes when living abroad.
    • Foreign Earned Income Exclusion: For those working internationally, IRS Form 2555 and its instructions explain how to claim the Foreign Earned Income Exclusion, which can reduce or eliminate U.S. tax on foreign income.
    • Employer Reimbursements: Although most moving expense reimbursements are now taxable, IRS Publication 521, Moving Expenses, provides historical reference and helps understand the tax treatment of various types of reimbursements, which can be useful for military personnel and for planning future moves if the tax laws change again.