The Longest Article You’ll Ever Read on the Moving Expense Deduction
I have been asked again and again to write an article on this topic. I haven’t until now because I don’t see a way I can write it and NOT be inaccurate or misleading or too incomplete without writing a huge article. If you read this whole article it will likely be the longest article you have ever and will ever read regarding the moving expense deduction. It seems like this should be a simple deduction. In most cases it isn’t terribly complicated. However, I run into many folks who want to deduct expenses which really shouldn’t be deducted. If you just read the Form 3903 instructions, it may seem like you have a relatively wide range of possible deductions. That is somewhat misleading. While IRS instructions and publications are designed to help taxpayers navigate tax filings and income and expense reporting, both the IRS and the courts indicate that these instructions and publications cannot be relied upon solely. Not only that, but if you find yourself misled by an IRS instruction and publication that is your problem, not an IRS problem. If you have penalties despite having followed or thought you followed an IRS instruction or publication and it is determined that you didn’t follow other higher level tax authority (which is pretty much every other authority- Internal Revenue Code, Code of Federal Regulations, court cases, Revenue Rulings, Revenue Procedures, etc.) too bad so sad. It is entirely possible, although I believe it to be unlikely, that I missed finding a court case or some other tax authority that allows you to deduct something you want to deduct contrary to my view. Or that permits you to treat something differently than I state here. If that is the case please let me know. Note that third party sources are at the bottom of the tax authority food chain, which really means no authority. And of course I have this disclaimer: Nothing in this article should be construed as tax advice for a specific taxpayer or specific tax situation. What is written here is to provide information to help you sort out your tax situation, but should not be solely relied on to make any tax decisions or tax filings. In most cases it is best to consult a tax professional when filing your tax returns and when making tax planning decisions. Tax laws change regularly and rulings and court cases come out regularly. These can impact the info provided in this article.
To be fully transparent, this topic area has further complications. Not only does the Internal Revenue Code (IRC) still have information regarding the non-military moving expense deduction in it from before 2018, but the Code of Federal Regulations (CFR) wasn’t and isn’t fully updated for both the pre 2018 law in effect in 2017 and the “2018 going forward law”. There are even pre-1970 moving expense regulations in the CFR still. There are provisions that I view as still being valid within the applicable CFR, since they don’t conflict with the IRC. And I haven’t found anything indicating that those portions of the CFR aren’t valid. I bet you are thinking that this really shouldn’t be that complicated. I agree, but for some reason we weren’t consulted when the laws and regulations were written.
Some Basic Principles
I have a two basic points for you to remember which may make accepting what you read here easier.
- It is rare for the tax code to permit “double-dipping” of tax benefits. And when it does it is usually absolutely clear. One example of that is the tax benefit of IRAs and the saver credit. IF qualifying you can get a tax deduction for contributing to a traditional IRA AND receive a tax credit that is commonly called the Saver’s Credit based on the same contribution. It is clear from reading the applicable portions of the tax code and even the IRS instructions and publications that this is okay. However, if you see a situation where you might get a double tax benefit you should be questioning.
- If someone else has paid for something, whether it is directly or indirectly (reimbursement) then it is rare that you would get a tax benefit because of that person or entity paying. Not being taxed on those funds as income is generally the best benefit you might get (there are situations where someone else paying for something can be taxable income for you, but not in the situation where the federal government is reimbursing you for your moving expenses- up to total of the actual valid moving costs).
The Moving Expense Deduction
You can find the line for the moving expense deduction on your tax forms on Schedule 1 Part II line 14 as an adjustment to income. You use Form 3903 to determine the number that goes on to this line. The moving expense deduction is known as an “above the line deduction”. This makes it more valuable than some other deductions because an above the line deduction can lower your adjusted gross income which in some cases can have a significant and good impact on your bottom line tax liability.
Form 3903 comes with instructions. There are additional instructions in Publication 521 Moving Expenses. Most publications that are in regular use get updated annually. Pub 521 still indicates it is for 2018 returns. This doesn’t mean that it doesn’t have value in tax return preparation, because it does. But it means you should be careful about relying on it.
Under current law the moving expense deduction is only available in association with active duty military situations. Basically what qualifies you is a PCS, Permanent Change of Station. The final PCS (retirement or separation PCS) is qualifying. For the military PCS provision, the general time and distance rules don’t apply. I mention this because those rules are still listed in the Internal Revenue Code since the “military only” provision of moving expense deduction now is actually a temporary suspension of the rule for everyone else that is in effect from 2018 through 2025. However there is a time rule regarding the last (separation/retirement) PCS.
The moving expense deduction is available when the move is pursuant to a military order and incident to a permanent change of station. The IRS identifies this such that:
A permanent change of station includes:
- A move from your home to your first post of active duty,
- A move from one permanent post of duty to another, and
- A move from your last post of duty to your home or to a nearer point in the United States. The move must occur within 1 year of ending your active duty or within the period allowed under the Joint Travel Regulations.
Spouse and dependents. If you are the spouse or dependent of a member of the Armed Forces who deserts, is imprisoned, or dies, a permanent change of station for you includes a move to:
• The member’s place of enlistment or induction;
• Your, or the member’s, home of record; or
• A nearer point in the United States.
If the military moves you to or from separate locations, the movesare treated as a single move to your new main job location.
Services or reimbursements provided by the government.
If any moving and storage expenses are furnished in kind or if reimbursement or an allowance is provided for such expenses, for the service member, spouse, or dependents then those will not be added to gross income. The section of the tax code, 217, applies to the spouse and dependents if moving to or from an area other than the service member IF moving and storage expenses are furnished in kind or if reimbursement or an allowance is provided. Again, the time and distance requirements do not apply for the spouse and/or dependents in this situation.
A foreign move has additional expenses that can qualify for the moving expense deduction. A foreign move is defined as any move for which the taxpayer (service member under current rules) is starting at a new work location outside of the United States. In this case the costs of moving household goods and personal effects to and from a storage area is a qualified expense. Additionally, the costs of storage for all or part of the time the service member is stationed overseas can be a qualified expense.
What moving expenses are deductible?
Straight from the tax code (section 217):
the term “moving expenses” means only the reasonable expenses—
- of moving household goods and personal effects from the former residence to the new residence, and
- of traveling (including lodging) from the former residence to the new place of residence.
Such term [moving expenses] shall not include any expenses for meals.
You can only deduct moving expenses which are qualified moving expenses AND are reasonable. Moving expenses include those expenses that are reasonable under the circumstances of your particular move. One person’s “that’s reasonable” is another person’s “that’s nuts”, so how do we know? Well the IRS gives some specific guidance, provides some examples, and there are some court cases out there. My answer is based on those.
An expense that isn’t absolutely necessary may be unreasonable. If an expense is a luxury it probably is not reasonable. If it doesn’t match your normal lifestyle it probably is not a reasonable expense. You don’t have to throw a going away party, so the party is not a reasonable expense. You don’t have to go on side trips to sightsee or vacation, so those aren’t reasonable expenses. If you are PCSing from Norfolk VA to Europe it is clearly not a reasonable expense for most of us to rent a $40 million yacht to move from VA to Europe.
An expense may be reasonable if it is common even though not viewed as necessary by everyone. For example shipping a pet is common, although not viewed by some as necessary. Shipping a pet is viewed as reasonable unless you are doing something like renting a $40 million yacht to ship the pet.
So if the expense is reasonable, I can deduct it?
Not necessarily. I start screening expenses with whether or not it is a qualified expense. Many of us would view traveling to and from the new duty station to find a residence in advance of moving as a reasonable expense. However, it is not a qualified expense so it cannot be deducted. Used to be, but no longer. Based on the IRC, the CFR, and Pub 521 we know specifics on what can and can’t be qualifying expenses. If they aren’t qualifying expenses they can’t be deducted. If the qualifying expenses were paid by another person or entity they can’t be deducted. If a reimbursement or allowance covers the qualifying expense, it isn’t ultimately deducted.
Non-qualifying or non-deductible expenses
1.Storage costs, other than the 30 days in transit mentioned under qualifying expenses or the storage permitted under a foreign move.
2. Cost sustained in the acquisition of property.
3. Cost and losses due to the disposition of property.
4. Penalties for breaking leases.
5. Losses sustained in disposing of memberships like gym memberships, tuition fees, and similar items.
6. Costs of refitting rugs or draperies.
7. Mortgage penalties.
8. Car tags or license plates.
9. Driver’s license.
10. Expenses of buying or selling a home (including closing costs, mortgage fees, and points).
11. Expenses of entering into or breaking a lease.
12. Home improvements to help sell your home.
13. Loss on the sale of your home.
14. Losses from disposing of memberships in clubs.
15. Mortgage penalties.
16. Real estate taxes.
18. Return trips to your former residence.
19. Security deposits (including any given up due to the move).
20. Expenses for employees such as a maid, nanny, or nurse.
22. Pet food.
22. No double deduction. If you are able to take a business deduction for any move related expenses, don’t deduct them as both a business expense and under the moving expense deduction.
23. Assets and non-consumables are not deductible as moving expenses. This basically means purchasing things that can be used for longer than a year and things that are designed for continual personal use are NOT deductible. Items on this list include the examples below:
- Handtrucks or moving dollies
- Plastic storage containers/totes
- Gun safes
- Recreational Vehicles
- Trailer hitches and towing bars
- Tire chains
- Pet carrier, kennel, or crate. Feeding and water bowls.
Qualifying or deductible expenses
- Costs for crating, packing, in transit storage and insurance for goods and effects.
- Cost of connecting or disconnecting utilities. This does NOT include deposits and regular utility bills. Just if there is a connect or disconnect fee.
- The costs of moving goods and effects from a location other than the former place of residence is qualifying but only up to the cost that it would have been if it was moved from the former residence.
- In transit storage costs up to 30 consecutive days of storage between the time they are removed from the prior residence and delivered to the new residence.
- Renting a trailer to move household goods.
- Insuring goods and household effects for the move.
- You can deduct the cost of lodging within 1 day of when your former residence is uninhabitable. This is generally viewed as when there is no furniture present.
- Lodging enroute to your new location, and the first night at the new location. After that, even if you are in temporary lodging, it is not deductible.
- Tolls and parking fees enroute,
- The actual costs (oil and gas) of driving your car for the move or the approved mileage rate.
- Costs of shipping vehicles.
- Costs of other reasonable methods of travel – bus, train, or plane for example.
What you used to be able to deduct.
I have spent some time reviewing a little history. Why does it matter? Because people remember and will tell you that you can or can’t do things based on the way it used to be, instead of the way it is now. Here are some items that used to be qualifying expenses for the moving deduction but ARE NOT VALID now:
- Deduct the costs of traveling to and from your new location to find a residence or a job. This means job hunting and house hunting trips before your move are not deductible.
- Deduct the costs to stay at the new location while hunting for a new residence or job. You get one night that is deductible your first night at the new location
- Deduct the costs of meals and lodging while in temporary quarters in the general location of the new place of work.
- Certain costs associated with the sale or purchase of a residence, the ending of a lease, or the starting of a new lease. There is too much detail in the “used to be” in this area to cover.
- Deduct expenses for meals.
Note that for some of these costs the government does reimburse you for them. You may receive per diem for temporary lodging and travel and meals. You may have meals covered under other reimbursements or allowances. That is not included in your gross income and is not taxable.
Reimbursements and other people’s money.
If other people pay for the moving costs, then it isn’t your expense. Whether the other people or entity pay it directly or reimburse you for it, it is not tax deductible for you.
This is easy when all your costs are covered. If the government pays for the truck moving your household goods directly then no income for you and no tax deduction for you. Easy peasy.
If you pay for the truck yourself and are reimbursed the exact amount of money it cost you, then no taxable income to you and no tax deduction for you.
The Travel W-2
A travel W-2 is often issued on a DITY or Personally Procured Move. The taxable income shown in the W-2 is the excess of what you were already reimbursed for. In other words the excess of the expenses that they reimburse you for are shown on the W-2 as taxable income. So if the government reimbursed you the $2000 moving costs you submitted to them for reimbursement and paid you another $1000 for the PPM/DITY move, then the $1000 is taxable and should show on box 1 of the travel W-2 and there will be tax withholding which is shown on box 2. The $2000 will NOT be in box 1 of your travel W-2. If you have valid moving expenses beyond what you were already reimbursed for, then you’ll be able to reduce taxable income – that $1000 in this case and possibly more if you have enough valid expenses.
Code P in box 12 of the travel W-2 should indicate the total non-taxable reimbursements that were reported.
The Form 3903 instructions and the tax code state that allowances and reimbursements for moving expenses are not taxable income. They also state that you don’t include moving expenses in your moving expense deduction if there was corresponding reimbursement. Some people think that since the Dislocation Allowance doesn’t have to be spent for moving expenses that you can ignore it when determining your deductible moving expenses. They also think they can ignore it because line 3 of the Form 3903 instructions say not to include it. However, those people think wrong. Dislocation allowance is specifically provided to offset the costs of moving. It is reimbursement for moving. DFAS defines it as such. The Joint Travel Regulations define it as such. And the IRS defines it as such. This means DLA has to be counted against valid moving expense deductions. One way to know this is the instructions for line 1 and line 2 of Form 3903. They both state “Also, don’t include any expenses that were reimbursed by an allowance you don’t have to include in your income”.
Some people might think that, well they don’t really mean DLA there. Even though DFAS says that DLA is reimbursement for moving expenses. Even though DLA is an allowance. For those people I suggest they take a look at how the IRS trains VITA volunteers. We can see in Pub 4491 with specific examples that the IRS expects DLA to be counted against valid moving expenses. Those people can also look at IRC Section 217 and CFR Section 217. If those people still disagree and choose to not factor DLA against valid moving expenses they should be prepared to explain to the IRS why an allowance provided to reimburse them for moving expenses isn’t an allowance provided to reimburse them for moving expenses.
Summary. Finally the End.
Yeah, that is a lot. It may seem like I’ve done a great job of taking something simple and making it complicated. But I didn’t do that. It just appears to be more simple than it is. I can’t say with certainty that I didn’t miss a “but” or “if”. I’m sure someone has or wants to deduct something I didn’t mention.
However, with the info in this article, and following the IRS publications, instructions, the CFR and IRC, you can get the moving expense deduction done right. Relying solely on tax software will NOT ensure you get it right.