How to Deduct Moving Expenses to Reduce Your US Expat Tax Liability
Big change for expats. The new law suspends the deduction for moving expenses, The new law also suspends the exclusion from taxable wages amounts received (directly or indirectly) from an employer as reimbursement of expenses which would be deductible as moving expenses if directly paid or incurred by the employee. Deductions are retained for members of the U.S. Armed Forces, their spouse and dependents.
Moving back to the United States or moving from the United States to a foreign country, your moving expenses may be deductible if they are related to work or you are retiring.
Moving back to the United States after having lived overseas or moving to a foreign country from the United States can be very expensive. Fortunately, the IRS is aware of the expenses you incur and offers a variety of deductions to help you save money on your US expat tax return. In this piece, we will take a look at moving expenses which are deductible and those which are not.
In order to deduct your moving expenses, you must meet 3 requirements when considering your relocation.
If you meet the following 3 conditions, you should be able to deduct your moving expenses:
- Your relocations is closely related to your job
- You meet the conditions of the distance test
- You meet the conditions of the time test.
Now, let’s examine each of these conditions so you understand how they apply to you and your move.
For moving expenses deduction your relocation must be closely related to your job. It must be closely related in both time and place to the location you will be working.
In order to be considered as ‘closely related in time’, you must report to work within 1 year of moving to your new place of residence. You don’t need to have work in place before you move, but you do need to begin working within 1 year of moving. If you do not begin working within 1 year of moving, you will not be able to claim your moving expenses on your US income tax return.
In order to have your move be considered ‘closely related in place’, your move must put you closer to your job than the distance from your original place of residence. If you are moving from one country to another to perform work in a new country, this test will be met.
In order to meet the conditions of the distance test, your new place of employment must be farther away from your former home than your place of employment was from your former home.
This is another test which should easily be met by moving to another country. In order to meet the conditions of the distance test, your new place of employment is required to be at least 50 miles farther from your previous place of residence than your place of employment was from your previous home. Also, the distance you travel between your home and your job must be the shortest of the most commonly used routes.
In order to meet the conditions of the time test, you must work a minimum number of weeks during the first 12 months of your arrival to your new place of residence.
To meet the conditions of the time test, you must be employed for a total of 39 weeks out of the first 12 months of having moved to your new place of residence. You don’t need to work for the same employer, nor do you need to work a consecutive 39 weeks; you merely have to be employed for a total of 39 weeks out of the first 12 month period of your relocation. Your work must be full time and in the same general commuting distance for all of the 39 weeks.
If you are self-employed, you must meet additional requirements. Not only must you work the same 39 weeks, you must work for a total of at least 78 weeks during the first 24 month period of your relocation. You may work for yourself or for another employer, but you must work full time for at least 78 weeks. The same general commuting distance rule also applies if you are self-employed.
If you meet the conditions listed above, you will be able to deduct all of your expenses related to your move. This includes lodging and the cost of moving all of your personal items and household goods.
Assuming you meet all of the conditions required to claim moving expenses, you will be able to deduct reasonable expenses. You may be unclear as to what is determined ‘reasonable;’ so we will take a look at what this means.
When considering the means of travelling from your old place of residence to your new home, you should choose the most direct route. If you fly, for example, and you take a ‘side trip’ for leisurely or sight-seeing purposes, you may not deduct the extra expenses as moving expenses. You may only deduct the expenses directly related to your move.
You also need to avoid excessively extravagant means of moving. Flying coach rather than first class is recommended. You may also consider staying at a modest hotel instead of the Four Seasons Hotel or some other expensive establishment. Remember, there is no set dollar amount that the IRS enforces, but it has been known to deny certain expenses if they seem too lavish.
There are additional expenses which are deductible. Among these are storage fees, packaging and moving expenses, and utility connects and disconnects.
There is a long list of deductible expenses when relocating from one home to another. These deductible expenses include:
- The cost of packing and transporting personal items and household goods,
- The cost of disconnecting or connecting utilities,
- The cost of shipping your vehicle overseas,
- The cost of relocating your pets,
- The cost of storage fees or relocating your personal items or household goods to an interim location other than your new place of residence (you may only keep your items stored for 30 consecutive days before moving them to your new home in order to deduct these expenses),
- The cost of moving each member of your household. Remember than all the members of your household do not need to be relocated at the same time, but you may only deduct the expenses of one trip for each member of your family.
There are some expenses which are not deductible. It’s important to be aware of this list of non-deductible expenses, so your US expat tax return doesn’t get changed or rejected.
Here is a list of moving expenses which ARE NOT deductible:
- The purchase price of your new residence,
- Vehicle registration,
- Your new local driver’s license,
- The expenses you incur when buying your new home or selling your old one (this includes mortgages, mortgage penalties, real estate taxes, etc),
- Any additional costs for terminating a lease early,
- Any loss you incur from lost or early terminated club memberships,
- The cost of time and resources spent house hunting, and
- Security deposits.
If you haven’t met the conditions of the time test before your US expat tax return is due, you may still file your return claiming your moving expenses if you expect to be working for a full 39 weeks during the first year of your relocation.
There are times in which your US income taxes will be due before you’ve had an opportunity to meet the time test. As long as you are working and have every intention of continuing to work for a period of at least 39 weeks out of the first year after your move, you may file your return and deduct your allowable moving expenses. This also applies to those who are self-employed and need to work for 78 weeks out of the 2 year period following your move.
If there are unforeseen circumstances which prevent you from working for the 39 weeks (or 78 weeks), you have 2 options. The first option is to amend the tax return for the year in which you claimed your moving expenses, calculating your tax without the exemption you claimed. Your second option is to include the deduction amount of your moving expenses from the previous year as ‘other income’ on Form 1040 in the year after you claimed your moving expenses as a deduction.
If you decide not to claim your moving expenses until you’ve actually met the time test, you will have the opportunity to file an amended return claiming your full available deduction. In this case, you may qualify for a refund once you’ve filed your amended return.
If you are retiring and moving back to the United States, you will not be required to meet the time test as long as your previous home and previous employer was outside of the United States.
When you retire from overseas work and move back to the United States, you will be allowed to deduct your moving expenses without having to meet the time test. In order to avoid the time test, however, your former home and your former employer must have been in a foreign domicile.