One sometime overlooked benefit of relocation is the potential ability to save some money on your taxes by using a moving expenses deduction. If you end up moving out of state and spending a significant amount of your hard-earned cash in the process, the chance to possibly get some of it back in a tax refund the following year definitely helps, especially if you are looking at some home improvement projects at your new house. Remember that home improvement projects at your primary residence also offer their own tax benefits.
For now, let’s focus on what it takes to deduct any moving expenses from your yearly tax bill. Here’s a closer look at the process.
What are the Rules for deducting Moving Expenses?
One important caveat to remember regarding moving expenses, is they are only deductible if you are relocating for your job. So, if you are moving somewhere because you like the climate, don’t count on deducting your moving expenses. Additionally, if your employer offers relocation benefits, those limit the amount you are able to deduct, but definitely keep track of your costs in case they exceed your employer-paid benefit.
The commute from your former residence to your new work location also needs to be at least 50 miles farther than your previous commute; so don’t expect to deduct expenses for moving inside your current metro area. You must be employed full time for at least 39 weeks for the first 12 months and 78 weeks for the first 24 months after you move, and any moving expenses must be incurred within the first year after you start work at the new location. If you are married and file taxes jointly, these rules must apply to at least one of the spouses on the tax return. Check out this IRS tax topic for more information.
It is important to note that moving expenses aren’t affected by the IRS standard deduction and thus aren’t part of the itemized deductions on IRS Schedule A. Thus, be sure to keep track of everything to see if your moving costs end up getting you a higher tax return or a lower tax payment the following year.
Download IRS Publication 521 and Form 3903
If you use a professional tax preparation professional, be sure to provide them with all the relevant moving expense information, in addition to the data on any relocation benefits you receive from your employer. If you do your own taxes, your first step is to download Form 3903 and Publication 521 which provide clear step by step instructions for calculating any moving expenses deduction while giving a complete overview of what items qualify for deduction. Keep an eye if any rules change when new documentation is published by the IRS; the linked forms are current as of the tax year 2014.
What Moving Expenses are Deductible?
If you qualify for deducting your moving expenses, it is important to note which items are actually deductible. All costs of transporting your household items — and storing them if necessary for up to 30 days — are deductible. This includes money spent moving yourself or if you hire a professional moving company.
Travel costs include mileage — more on the calculation shortly — and most money spent on hotel rooms. Money spent on meals when moving are unfortunately not deductible. As far as mileage, you are able to either deduct your out of pocket expenses spent on gas and oil or use a calculation of 23.5 cents per mile traveled. If traveling separately, you can deduct the expenses for one trip per person.
After adding the total spent on transporting your items, storage, and mileage costs, subtract any relocation expense benefit received by your employer. This amount is listed in Box 12 marked with a code “P” on your W-2 Form. If your expenses were greater than your employer benefit, congratulations; you are able to deduct the difference between the two on line 26 of your Form 1040.
Make sure to fully read IRS Publication 521, as it contains valuable information and some detailed examples to help you fully understand how to calculate your moving expense deduction. This comes in handy if you are moving out of the country, or if you are self-employed. If you have additional questions, be sure to contact your account or a local tax preparation professional.