Prepared by Worldwide ERC® Tax Counsel, Peter K. Scott
Peter Scott Associates
Current as of January, 2017
The Revenue Reconciliation Act of 1993 substantially changed the moving expense deduction effective for expenses incurred after December 31, 1993.
The principal changes eliminated any deductions for meals, house hunting, temporary living, and buying or selling a residence; changed the distance requirement from 35 to 50 miles; and permitted an exclusion from income for reimbursed, deductible expenses, with any unreimbursed, deductible expenses deducted by the employee "above the line" rather than as an itemized deduction. Consequently, the only deductible moving expenses are for moving household goods, and travel (excluding meals) at the time of the move. The outline below as well as the rest of the items in the MasterSource Tax Index, are based upon the law after 1993.
- The employee’s perspective
- Employer payment of moving expenses
The employer’s payments or reimbursements of moving expenses are income to the employee, but only to the extent an employee would not be entitled to a deduction for the expense. If the expenses meet the requirements for deductibility under Section 217, and the employee furnishes an accounting of his/her expenses to the employer, and returns any excess of advances over expenses, the amounts are excluded from the employee’s income.
- The employee’s deduction in general
Deductions for moving expenses are governed by section 217 of the Internal Revenue Code. Even if the employer does not reimburse the employee for some or all expenses, the employee is still entitled to deduct allowable moving expenses.
If an employee is fully reimbursed for otherwise deductible moving expenses, the employee does not take a deduction. As mentioned above, the amounts are simply excluded from income, and appear on the W-2 as non-taxable income. If deductible expenses are not reimbursed, however, the employee is entitled to a deduction to that extent. The deduction is not an itemized deduction on Schedule A, as it was prior to 1994. Rather, the deduction is taken "above the line", that is, in addition to either the standard deduction or itemized deductions, whichever applies to the employee. The expenses deductible are for the transportation of household goods and personal items from the former to the new residence (a residence may be a single family house, townhouse, condominium, houseboat, or other place of abode), including up to 30 days of in-transit storage, and the costs of traveling from the former to the new residence for all members of the household, including lodging (but not meals).
Some expenses related to moving are nondeductible. Examples are home repair, loss on the sale of a home, house hunting trips, temporary living costs, meals, sale or purchase expenses, mortgage penalties, any part of the purchase price of a new home, real estate taxes, loss on club memberships, and the cost of new automobile license plates or a new driver’s license.
- Qualification requirements and limitations
There are qualification requirements regarding the nature of the move in order for expenses to be deductible.
- The move must be in connection with beginning work at a new job location, or beginning work in a new job in a new job location.
- The commute from the old residence to the new place of work must be at least 50 miles farther than the commute from the old residence to the old place of work.
- The employee must be employed full time for 39 weeks during the twelve-month period beginning when the employee arrives at the general location of the new place of employment. (There are certain situations in which the employee will not have to meet this test, such as in the case of disability). The employer may exclude moving expense reimbursements from the employee’s income or the employee may take the moving expense deduction at the time the employee’s tax return is filed, even though the 39 week test has not yet been met, if it is reasonable to believe that the employee will meet the test.
- The expenses must be incurred "in connection" with the move. Expenses incurred within one year of arriving at the general location of the new place of employment automatically meet this requirement. Expenses incurred later will also meet this requirement if the delay is due to circumstances such as inability to move the employee’s family for a period of time.
- All expenses must be reasonable to be deductible. Extravagant expenses are nondeductible.
- There is no limit on the dollar amount of expenses deductible.
- The rules apply to domestic moves. Special rules may apply to moves involving foreign countries.
- For further reference, IRS Publication 521 is a helpful guide to the tax treatment of moving expenses.
- The employer’s perspective
- The employer’s deduction
Generally, amounts the employer expends to facilitate the employee’s job-related move are deductible as ordinary and necessary business expenses. The employer may deduct such expenditures whether or not they are characterized as compensation to the employee, and whether or not they are paid directly to the employee.
- Payroll taxes and withholding
- Determination of liability.
Generally, the employer is liable for collecting and paying payroll taxes and withholding on moving expense reimbursements and other payments determined to be income to the employee. However, the employer is not liable for payroll taxes and withholding on amounts excluded from the employee’s income (i.e. deductible moving expenses), or if it is reasonable to believe that a corresponding moving expense deduction is allowable to the employee. The deduction’s being "allowable" should be taken to mean only that the deduction is of a type that would be allowable to a hypothetical employee who met all the requirements for the deduction, and not necessarily that the particular employee actually will take the deduction.
- An example.
The employee incurs $10,000 in moving expenses, consisting of $5,000 for moving household goods, $1,000 for transportation at the time of the move, $1,500 in temporary living expenses at the new location, and $2,500 in home selling and purchase expenses. The employer reimburses the employee for all the expenses. The employer must include the latter two amounts (totaling $4,000) in the employee’s W-2, and must withhold and pay payroll taxes on that amount. The employer does not include $6,000 as taxable wages on the W-2, and does not withhold or pay payroll taxes on that amount. Alternatively, the employer may choose to include the $6,000 as taxable wages. If it is does so, it still need not withhold or pay payroll taxes because it is reasonable to believe that the employee will have a deduction for the $6,000. The employee will then take an offsetting $6,000 deduction on his or her tax return.
The foregoing is intended as general information only. Regarding your specific situation, Worldwide ERC® suggests that you consult with your own tax or legal advisor as appropriate.
For reprint information contact: GovernmentRelations@WorldwideERC.org