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Are Relocation Expenses Tax Deductible? The Definitive Guide

The short answer is: Not generally, no. As of the Tax Cuts and Jobs Act of 2017, the deduction for moving expenses has been suspended for most taxpayers. This suspension remains in effect for tax years 2018 through 2025. Therefore, if you moved during this period for a new job, you likely cannot deduct your relocation expenses on your federal income tax return.

Understanding the Shift in Tax Law

Before 2018, deducting relocation expenses was a common practice for individuals starting new jobs in different locations. However, the landscape shifted dramatically with the introduction of the Tax Cuts and Jobs Act (TCJA). This act significantly altered many aspects of the U.S. tax code, and the moving expense deduction was one of its casualties.

The rationale behind suspending the deduction was primarily to simplify the tax code and offset some of the revenue losses associated with other tax cuts included in the TCJA. While this has simplified things for the IRS, it has undeniably increased the financial burden on individuals and families who undertake significant relocation for employment opportunities.

The Exception: Active Duty Military Personnel

There is, however, a crucial exception to this rule: Active-duty members of the Armed Forces. If you are in the military and are required to move due to a permanent change of station (PCS), you may still be able to deduct your moving expenses. This exception recognizes the unique circumstances and frequent moves faced by military personnel serving our country.

What Qualifies as a Permanent Change of Station (PCS) for Military?

A PCS is a move required by the military that involves relocating to a new permanent duty station. This often includes a transfer from one base to another or a move overseas. To qualify for the deduction, the move must be incident to a military order, meaning it’s a direct result of your service obligations.

How Military Personnel Can Deduct Relocation Expenses

If you qualify as an active-duty member undertaking a PCS, you can deduct reasonable moving expenses. This typically includes:

Transportation of household goods and personal effects: Costs associated with packing, crating, hauling, and insuring your belongings.
Travel expenses: Lodging and transportation costs (including mileage) for you and your family members traveling to the new duty station.

It’s crucial to keep meticulous records of all moving expenses, including receipts, invoices, and travel logs. You’ll typically use Form 3903, Moving Expenses, to claim this deduction.

FAQs About Relocation Expenses and Taxes

Here are some frequently asked questions to further clarify the complexities surrounding relocation expenses and tax deductions:

1. What Specific Expenses Qualify as “Moving Expenses” Under the Old Rules (Pre-2018)?

Before the TCJA, deductible moving expenses included:

Transportation of household goods and personal effects.
Travel expenses (including lodging) to the new home.
Expenses for en route meals were not deductible.
Storage expenses (up to 30 days) incurred while waiting to move into the new home.
Expenses related to breaking a lease.

However, even under the old rules, certain expenses were never deductible, such as:

Expenses for house-hunting trips.
Temporary living expenses in the new location.
Real estate transaction costs (buying or selling a home).

2. What Were the Distance and Time Tests for Moving Expenses Before 2018?

To deduct moving expenses under the old rules, you had to meet two key tests:

Distance Test: Your new job location had to be at least 50 miles farther from your former home than your old job location was.
Time Test: You had to work full-time in the new location for at least 39 weeks during the 12-month period immediately following your arrival. Self-employed individuals had to work full-time for at least 78 weeks during the first 24 months following their arrival, with at least 39 weeks during the first 12 months.

Failing to meet these tests meant you couldn’t deduct your moving expenses, even if they were otherwise qualifying.

3. Are Employer-Paid Relocation Benefits Taxable?

Yes, unfortunately. Even though you can’t deduct moving expenses yourself (with the military exception), any relocation benefits your employer provides are considered taxable income. This includes direct payments, reimbursements, and payments made directly to vendors on your behalf. You’ll see these benefits reflected in your Form W-2. This “double whammy” – no deduction and taxable benefits – makes relocation a more significant financial burden.

4. Can I Deduct Moving Expenses If I Am Self-Employed?

Generally, no. The suspension of the moving expense deduction applies to self-employed individuals as well. The only exception remains for active-duty military personnel undergoing a PCS. Previously, self-employed individuals had to meet the more stringent time test of 78 weeks of full-time work during the first 24 months at the new location to qualify for the deduction.

5. What If My Employer Reimburses Me for Moving Expenses?

If your employer reimburses you for moving expenses, the reimbursement is considered taxable income. You’ll need to report this income on your tax return. Unfortunately, you cannot deduct the expenses because of the TCJA suspension. The employer will include the reimbursed amount in your W-2 form.

6. What Records Should I Keep Related to Moving Expenses?

Even though the deduction is suspended for most, it’s still prudent to keep detailed records of all moving expenses, especially if you are in the military or anticipate a potential reinstatement of the deduction in the future. These records should include:

Receipts for transportation of household goods.
Invoices from moving companies.
Mileage logs for personal vehicle use.
Hotel bills.
Other related expenses.

Having these records readily available will be beneficial if the tax laws change or if you need to substantiate any claims.

7. Are There Any State-Level Deductions for Moving Expenses?

Some states offer a moving expense deduction or credit, even though the federal deduction is suspended. It’s crucial to check with your state’s department of revenue or a qualified tax professional to determine if your state allows for any relocation expense deductions or credits. State tax laws can vary significantly, so don’t assume that federal rules apply universally.

8. Can I Amend a Prior Year’s Tax Return to Claim Moving Expenses?

If you moved before 2018 and met the eligibility requirements, you may be able to amend your tax return to claim the moving expense deduction if you didn’t do so originally. You generally have three years from the date you filed your original return (or two years from the date you paid the tax, whichever is later) to file an amended return.

9. How Does the Moving Expense Deduction Affect My Tax Bracket?

Before its suspension, the moving expense deduction was an “above-the-line” deduction, meaning you could claim it regardless of whether you itemized deductions or took the standard deduction. This reduced your adjusted gross income (AGI), which could potentially lower your tax bracket and overall tax liability. The suspension means a higher AGI for those who relocate for work.

10. What If I Moved in 2017 but Paid Some Moving Expenses in 2018?

Since the Tax Cuts and Jobs Act took effect on January 1, 2018, any moving expenses paid in 2018 are generally not deductible, even if the move originated in 2017. The critical factor is when the expenses were paid, not when the move occurred.

11. How Does the Suspension of the Moving Expense Deduction Impact Job Offers?

The suspension of the moving expense deduction has undoubtedly impacted negotiations around job offers. Potential employees are now more likely to request higher salaries or more generous relocation packages to offset the increased tax burden associated with moving. Smart companies are adapting their offer packages to remain competitive.

12. Is There Any Chance the Moving Expense Deduction Will Be Reinstated?

Tax laws are subject to change, and there is always a possibility that the moving expense deduction could be reinstated in the future. Political and economic factors could influence this decision. Keep an eye on legislative updates and consult with a tax professional to stay informed about potential changes.

Conclusion

While the current tax landscape is unfavorable for individuals relocating for work (except for active-duty military), understanding the intricacies of the former rules and potential future changes is essential. Always consult with a qualified tax professional to ensure you are taking advantage of any available deductions or credits and complying with all applicable tax laws. The absence of a federal deduction simply reinforces the need for meticulous planning and, potentially, stronger negotiation skills when considering a job that requires a significant move.