When I finished high school, I chose to attend Hendrix College in Conway, Arkansas to pursue my degree. Being a liberal arts school, Hendrix attracted many students wanting to pursue advanced degrees such as medical doctors, PhD's, and attorneys. As graduation neared, I watched as many of these friends packed up to move to other schools to pursue these degrees. They moved all over the country, places like Corpus Christi, Baton Rouge, Houston, and even as far as Palo Alto.
Now, these friends are completing their advanced degrees and getting jobs, some of which are located even further away. We're talking California to Maryland or Texas to Massachusetts, and when I hear about these moves, after offering congratulations, I always remind them to keep their receipts. Here's why.
The IRS allows an adjustment to income for qualified moving expenses. An adjustment to income is a reduction in the taxpayer's gross income to arrive at adjusted gross income (AGI) and is reported on page 1 of the 1040. For expenses to qualify, they have to meet three simple criteria: the move must be closely related to work, meet a distance test, and meet a time test.
Criteria
First, the move must be closely related to the start of a job. This can be a new job, or a relocation for an existing job. The IRS considers moving expenses incurred within 1 year of the start of a new job to be closely related to the start of work. This means if a move in June for a job that starts in August would qualify. However, if a taxpayer moves in 2010 and is unemployed until 2013, then the moving expenses would not qualify for the deduction.
Second, the move must satisfy the distance test. This basically means that your new job must be at least 50 miles away from your old home. If a taxpayer that currently lives 5 miles away from their current job takes a new job, the new job will have to be at least 55 miles away from their old home. Pretty easy to satisfy this test if the taxpayer is moving from Florida to Oregon, but not so much if they are moving within the same city or state.
Third, the taxpayer must meet the time test. This means the taxpayer (if an employee) must work full time for at least 39 weeks of the first 12 months after moving. A taxpayer that moves from Louisiana to Wyoming for a job but quits after a month cannot deduct their moving expenses. This same test applies to self-employed taxpayers, but doubled, meaning they must work full time for at least 78 weeks of the first 24 months after moving. Taxpayers may claim the deduction if they have not satisfied the test but expect to, and if the circumstances change they are required to go back and amend that return.
Qualified expenses
Taxpayers that meet the criteria can claim the moving expenses adjustment for moving and storage of household goods and travel. This includes hiring movers, renting moving vehicles (trucks or trailers), storage units, and lodging along the way. Taxpayers that use their own vehicles to transport their belongings can also take a deduction for the greater of 1) actual expenses for gas and oil or 2) mileage at a rate of 24 cents per mile. This deduction will most likely depend on how far the move is, and whether the taxpayer drives a Suburban or a Prius.
There is NO deduction for meals and entertainment, and the travel expenses must be reasonable. For example, if during a cross-country move the taxpayers decided to spend 2 nights at a luxurious spa, that lodging is not reasonable and does not qualify as a moving expense.
Reimbursement by employer
In some cases, the employer will provide an allowance or reimbursement to the employee for moving expenses. This amount is usually reported on the employee's W2 and must be used to reduce the amount of moving expenses incurred by the taxpayer.
Taxpayers claim moving expenses on Form 3903 which will accompany their Form 1040 for that tax year. Because of the amount of subjectivity involved in this deduction, it is recommended that taxpayers keep copies of all of their receipts and mileage logs.