When employees are relocated from one workplace to another or move to begin a new job, the employer often pays for the costs of the move, either directly or by reimbursing the employee for moving expenses. Generally, if an employer reimburses an employee or pays a third party directly for moving expenses that qualify for a tax deduction, the amount reimbursed or paid is not included in the employee's income. All other amounts paid or reimbursed must be included in income and are subject to federal income tax withholding and social security, Medicare, and local taxes.
Initial Tests of Deductibility
Before any expenses of a job-related move can be considered deductible and reimbursements for them excluded from income, two tests must be met.
The new workplace must be at least 50 miles farther from the employee's old residence than the previous workplace was (e.g., if the employee's old job was 15 miles from his old residence, the new job must be at least 65 miles from the old residence). If there was no previous workplace, the new workplace must be at least 50 miles from the employee's old residence. The distance measured by this test is the shortest of the most commonly used routes between the two points.
During the 12-month period immediately following the move, the employee must work full-time for at least 39 weeks in the general location of the new workplace. This requirement does not apply if the employee cannot meet it because of death, disability, involuntary termination of employment (except for willfull misconduct), or transfer for the employer's benefit.
If the employer reasonably believes the employee will meet these two tests, payments made to a third party or reimbursements made to the employee for expenses related to the move are not included in income so long as the expenses themselves meet the tests for deductibility.
Deductible Moving Expenses
There are only two types of deductible moving expenses--transportation and in-transit storage of household goods and personal effects, and traveling from the old residence to the new residence (including lodging but not meals).
Transportation of Household Goods
All reasonable expenses incurred in packing and moving household goods and personal effects to the new residence and storing and insuring them while in transit are deductible. Storage costs constitute "in-transit" expenses if they are incurred within 30 days after the goods and effects are moved from the old residence and before delivery to the new residence. The employer can reimburse the employee for the expenses or pay a moving company directly.
Expenses of Traveling From Old Home to New Home
All reasonable expenses incurred while traveling from the employee's old home to the new home, such as transportation and lodging during the trip, are deductible. However, there is no longer any deduction allowed for meal expenses while taveling to the new residence. The mileage rate for moving expenses is 19 cents per mile (27 cents per mile after June 30, 2008).
Members of Household Are Included
The deduction for an employee's moving expenses includes amounts spent on transporting and storing household goods and personal effects belonging to members of the employee's household who live in both the old and new residences. Their reasonable expenses in traveling from the old home to the new home are also deductible to the employee.
Expenses Must Be Reasonable
Moving expenses are deductible only to the extent they are reasonable under all the circumstances related to the move. This means the shortest and most direct routes must be taken when traveling and conventional modes of transportation must be used. If not, any excess expenses incurred are not deductible. Also, lodging expenses incurred while traveling must not be "lavish or extravagant."
Qualified Moving Expense Reimbursements Are Nontaxable Fringe Benefits
The amounts paid or reimbursed by the employer are a nontaxable fring benefit under IRC 132(g) to the extent the moving expenses qualify for a deduction and if the employee did not deduct them in a previous year. If the employer does not reimburse for the full amount of the qualified moving expenses, the employee can deduct the excess expenses from gross income on his or her personal income tax return. Reimbursed moving expenses are subject to the same rules relating to accountable plans that govern reimbursement of employee business expenses. This means that employees must substantiate the amount and business purpose of the expenses, as well as return any amounts paid by the employer in excess of the substantiated expenses within a reasonable period of time.
Nondeductible Moving Expenses and Nonqualified Reimbursements
Employer payments or reimbursements for expenses other than transportation of household goods or traveling from the employee's old home to the new home are included in the employee's income for federal and state income tax withholding and social security, Medicare, and local tax purposes. Reimbursements for or payment of the following common nondeductible expense are included in the employee's income:
- cost of meals while traveling from the old home to the new home
- pre-move househunting expenses
- temporary living expenses after starting work in the new location
- real estate expenses incurred by the employee in selling a residence in the prior location and/or buying one in the new location
When an employee sells his home through a relocation company acting as the employer's agent and the employer pays expenses related to the home (e.g., taxes, maintenance, insurance) before the employee transfers the "benefits and burdens of ownership," the amounts paid by the employer are taxable income to the employee.