Tests to qualify for the moving expense deduction

Moving expenses can be taken as a deduction in calculating Adjusted Gross Income, so they will directly reduce the amount of income subject to tax. In order to claim the deduction, you must meet three tests:

1. Your move must be closely related to the start of work.
2. You must meet the distance test.
3. You must meet the time test.

Closely related to the start of work

The closely related test refers to both time and place. Closely related in time generally means moving expenses incurred within one year from the date you start work at the new location. For example, if you started working at a new location and moved your family later, the move still qualifies. Closely related in place means your new home is closer to your new place of work than your old home would have been.

Distance test

Your new main job location must be at least 50 miles farther from your former home than your old job location was from your former home. If you move in order to start your first full-time job, your place of work must be at least 50 miles from your former home. This also applies if you move in order to go back to work after a substantial period of unemployment or part-time work.

Time test

If you are an employee, you need to work full-time at your new location for 39 weeks during the first 12 months. The 39 weeks do not have to be consecutive or for the same employer. If you are self-employed, the requirement is 78 weeks during the first two years. If you are married filing jointly, either spouse can meet the time test, but you cannot add your weeks together in order to meet the test.

You can deduct moving expenses even if you haven’t yet met the time test by the due date for filing your tax return. Then, if for whatever reason you don’t eventually meet the time test, you must either:

1. Report the moving expenses you previously deducted as other income on your return for the year you can’t meet the test, or
2. File an amended return for the year you took the moving expense deduction.

There are exceptions to the time test. You do not have to meet that test in any of the following cases:

• You are in the Armed Forces and were assigned to a different station.
• You were working outside the United States and moved back to the U.S. to retire.
• You are transferred for your employer’s benefit or are laid off.

Moving expense reimbursements

If you receive a payment from your employer for your moving expenses, that payment may be reimbursement for specific expenses, such as your moving company bill, your airfares, or other expenses. Or it may be an advance or an allowance for a certain amount of money. How you treat that payment on your tax return will depend on whether you are expected to provide receipts and account to your employer for the moving expenses. And it will also depend on whether your employer is reimbursing you for expenses that would be deductible as moving expenses or for expenses that would not be deductible, or a combination of both. The IRS instructions and publications refer to "accountable plans" and "nonaccountable plans."

If you present receipts and account for the expenses that are being reimbursed, your employer should not include that amount in your compensation, in box 1 of your W-2. Instead, your employer should report the reimbursement in box 12 code P on your W-2. This is the amount you should report on line 4 of Form 3903 – Moving Expenses. If the reimbursement is more than your actual deductible expenses, the excess is taxable compensation to you. On the contrary, if the reimbursement is less than your actual deductible expenses, you can take the difference as a deduction.

If your employer reimburses you for the exact amount of your deductible moving expenses and reports this amount in box 12, code P on your W-2, you do not have to include the amount in income and do not need to file Form 3903.

If your employer reimburses you for expenses that would not be deductible as moving expenses, such as reimbursement for the loss on the sale of your home, this payment should be included in box 1 of your W-2 and is taxable compensation to you.

If your employer reimburses you for both deductible and nondeductible expenses, your employer should determine how much must be reported in box 1 of your W-2 as taxable compensation and how much should be reported in box 12, code P as deductible moving expenses.

If you are not reimbursed, you can deduct your allowable moving expenses the year you paid them, or the year you incurred them.

Moving expenses that can be deducted

The types of moving expenses you can deduct fall into two general categories:

1. Moving your household goods and personal effects, including in-transit or foreign-move storage.
2. Traveling (including lodging but not meals) to your new home.

The expenses must be reasonable and travel must be by the shortest, most direct route by conventional transportation. Costs for stopovers or side trips cannot be deducted. You can deduct moving expenses for yourself and members of your household.

Moving household goods and personal effects

You can deduct:

• the cost of packing, crating and transporting your household goods and personal effects and those of the members of your household,
• the cost of in transit storage,
• any costs of connecting or disconnecting utilities,
• the cost of shipping your car and household pets, and
• the cost of moving household goods and personal effects from a place other than your home, up to the amount it would have cost to ship them from your former home.

In-transit storage includes the cost of storing and insuring your household goods and personal effects for up to 30 days, after they are moved from your former home and before they are delivered to your new home.

Travel expenses

You can deduct the reasonable cost of transportation and lodging for one trip, for yourself and members of your household, from your old home to your new home. You do not all have to travel together or at the same time. You can deduct lodging expenses for one day in the area of your old home, after you could no longer live in your home because everything was packed. Meal expenses are not deductible.

If you travel by car, you can deduct either your actual expenses for gas and oil, if you keep adequate records, or you can take the standard mileage rate (cents per mile, as published by the IRS each year). In either case, you can also deduct parking and tolls, but not general repairs and maintenance on your car, insurance, or depreciation.

Moving Outside the U.S.

If you move to a location outside the U.S., you can deduct the same two categories of expenses indicated above, plus:

• the reasonable expenses of moving your household good and personal effects to and from storage, and
• the reasonable expenses of storing your household goods and personal effects while you are working outside the U.S.

But, if you take advantage of the foreign earned income exclusion, you cannot deduct moving expenses that relate to the income you are excluding.

Nondeductible Moving Expenses

The following expenses are specifically identified by the IRS as nondeductible:

• Pre-move househunting expenses
• Temporary living expenses
• Meal expenses
• Storage charges except those incurred in transit and for foreign moves
• Any part of the purchase price of your new home
• Home improvements to help sell your home
• Expenses of buying or selling a home
• Loss on the sale of your home
• Mortgage penalties
• Real estate taxes
• Expenses of getting or breaking a lease
• Security deposits
• Refitting of carpets and draperies
• Car tags
• Driver’s license
• Losses from disposing of memberships in clubs

If your employer reimbursed you for any of these expenses, the reimbursement should be included in your taxable compensation.

Filing requirements

In order to claim the moving expense deduction, you will need to file Form 3903 – Moving Expenses. Attach it to your 1040 if you file by paper. Form 3903 is available in the free e-filing services on the IRS website.