How to Deduct Your Moving Expenses

October 12, 2016

Editor’s note: The moving expense deduction was eliminated with the passing of the Tax Cuts and Jobs Act of 2018, but would still apply for tax year 2017 and prior.

I know several people who have embarked upon long distance moves recently, which also means that they were often changing jobs. My first question when I learned of the moves was, “You know you can deduct your moving expenses, right?” First, here’s what the IRS has to say about it:

If you moved due to a change in your job or business location or because you started a new job or business, you may be able to deduct your reasonable moving expenses but not any expenses for meals [emphasis added]. You can deduct your moving expenses if you meet all three of the following requirements:

  • Your move closely relates to the start of work
  • You meet the distance test
  • You meet the time test

Here’s what that means:

Related to the start of work: Your move doesn’t have to be because you got a new job, but the two events do need to be closely related. Specifically, you can deduct moving expenses incurred within one year from the date you first started your new job.

Distance test: Your new job must be at least 50 miles further from your old home than your old job was from your old home. If you weren’t working before you moved, then your new job must be at least 50 miles from your old home.

For example, when I graduated college in Michigan and moved to Cincinnati to start my new job, I was able to deduct my moving expenses. But when I moved to a new house in Cincinnati about the same time I started a different job, my new commute was only 5 miles longer than my old commute, so those expenses were not deductible. If you had a 5 mile commute that turned into a 55 mile commute and you switched jobs to work closer to home, you could deduct.

Time test: You have to work full-time at least 39 weeks during the first 12 months immediately after you arrive in your new location. If you’re self-employed, that time requirement increases to require full-time work for at least 39 weeks out of 12 months and for a total of at least 78 weeks during the first 24 months. So a self-employed person who works full-time for a year and 26 weeks from the day they arrive would qualify. There are exceptions to this rule for death, disability, involuntary separation, and a few other things. Publication 521 lists them all.

If you pass all of those tests, then you can deduct your moving expenses. It’s what we CPA geeks call an “above the line” deduction, which has a more favorable effect on your taxes than “below the line” deductions like mortgage interest, taxes and charitable giving. Moving expenses actually decrease your adjusted gross income, a number upon which other tax calculations are determined, including eligibility to deduct medical expenses and even your state taxable income.

What You Can Deduct

Generally speaking, you can deduct any expenses that were incurred to move your stuff, including travel. That includes the cost of storage up to 30 consecutive days, supplies such as tape, boxes, moving blankets, etc., any costs to move pets (I once had a client pay FedEx to move his horse from Florida to California) and your mileage for making the drive there. If your move involves an overnight in a hotel, you can also deduct that along with the cost of renting a moving truck. You’ll have to complete Form 3903 and file it with that year’s return and make sure you keep receipts for everything in case the IRS wants proof.

Remember, the purpose of the move doesn’t have to be because you found a new job. You can move to a new place because you want to move and as long as you switch jobs and meet the three tests, you also get a little tax boost to offset the costs. Moving is expensive. Take advantage of all the breaks you can get!

 

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My Advice to Recent College Grads

August 26, 2016

At one of our client sites, I was able to meet with about a dozen new hires, all of whom are very recent college graduates. They are starting their first “real jobs” and want to get their financial lives off on the right foot. During training, it was suggested that they sign up for a one-on-one financial coaching session, and many of them took HR up on that suggestion.

I had a blast during those sessions because most of the kids (yeah, I’ll call them that because I have a daughter roughly the same age) who came in said that they had no idea how to handle their new income. They were fine while in college, working summer jobs or some part-time jobs during school for spending money. But being out in the real world, with real responsibilities like bills to pay and student loans coming out of deferral, was a wee bit scary for many of them.

While they all had different incomes and amounts of student loan debt, there was a lot of common ground with this group.  My daughter is only a year behind them, so I can already see the conversation we are going to have next summer when she lands her first job. In that discussion, I’ll ask her to do a few of the things that came up in the sessions last week.  For recent college graduates or anyone looking to get their financial life started on the right track, here are some principles and tools that I think can help build the foundation of the financial life that should lead to long term financial security.

Spend less than you make and know where your money goes.

Mint is a great free tool to track spending. With the alerts feature, get a text message when you hit your monthly budget for one or two “hot spots“ in your budget (where you think you might overspend). The Mint app on my phone is how I start almost every morning. You can also go old school Excel with this Expense Tracker. However you do it, understand where your money is going and make sure that you spend less than you make.

Automate your savings.

Make sure that you are contributing to your 401(k) in an amount that is equal to or greater than your employer’s match.  If possible, get your contribution plus the match to be 15-20% of your compensation. If you can’t do that right away, enroll in the rate escalator feature of your 401(k) or make it a habit to increase your contribution by 1% every time you get a pay increase.

Set up a savings account in a bank or credit union that isn’t your primary bank. The goal is to create a speed bump between you and your money so that the savings grow all the time. Once the account is set up, get a direct deposit (something small like $10, $20, or $50 per pay so that it’s not a burden) going into that account with each paycheck. That’s going to be your long term emergency fund and perhaps the down payment on your first house.

Always know your credit score.

No one should ever have to pay for their credit score. That’s a sentence that I firmly believe. The good news is that with free services offered by Credit Karma and CreditSesame , you can track your credit score and see your credit reports at any time.  (Checking your own score is NOT going to count as an inquiry and have a negative impact on your score.) Both sites also have great alerts, phone apps and tips for how you can increase your credit score over time.

Pay down debt rapidly. Debt is NOT your friend.

Use this Debt Inventory to keep a record of who you owe and how much. Enter your current debts and save it as “August 2016” debt. Then when you get your next batch of statements, update the sheet and save as “Sept 2016.” Update until they are at $0. Print them out so that you can track the progress you’re making on a monthly basis.

Pay only the minimum on all debts except the one with the highest rate of interest. Circle that one with a red pen and consider it your enemy. Throw every ounce of financial energy you have into eliminating that debt. When it’s gone, lather – rinse – repeat.

As the foundation of a long term secure financial future, these steps will help get you to a place where you’re never really worried about money. While they look very simple (because they ARE!), most people that I meet with are not doing these very basic steps. If you start your career with them, you will get your financial life well ahead of most of America and of your peer group.

 

 

GUEST BLOG POST: She Who Hesitates, Loses

September 08, 2011

Beware the financial expert who has the answer before you have even posed the question.  It’s a telltale sign that he or she isn’t really interested in the facts or circumstances of your personal situation, and has something to “sell,” whether you need it or not.  As the saying goes, when all you have is a hammer, then everything (or everyone) looks like a nail.

As a CFP® professional, my usual answer to most questions is “It depends…”  It depends on your tax bracket, your marital situation, your age, your objectives, etc.  And then we get down to work.  But I have to admit, there is one situation where I am tempted to make a recommendation no matter the question, or the personal details. Continue reading “GUEST BLOG POST: She Who Hesitates, Loses”