Signs of the Times: How Tax Reform Has Limited Access to Moving Expense Deductions
Dykxhoorn, Hans J., Sinning, Kathleen E., The National Public Accountant
Prior to the Tax Reform Act of 1986, moving expenses were permitted as a tax deduction in calculating adjusted gross income (AGI) if they were incurred by an employee or self-employed individual as a result of a change in the principal place of work. This treatment resulted in a tax savings for both taxpayers who used the standard deduction as well as taxpayers who itemized their deductions, since the moving expenses could be deducted in either case.
The Tax Reform Act of 1986 changed the tax treatment of moving expenses by requiring that they be classified as an itemized deduction on Schedule A. The change resulted in a hardship for many taxpayers since those who could not itemize lost the opportunity to deduct the costs of moving. The situation was also made worse for taxpayers who were reimbursed by their employers for the move since the reimbursement was required to be included in gross income.
The Revenue Reconciliation Act of 1993 has again made modifications in the treatment of moving expenses effective for costs incurred after December 31, 1993. The new law changes the distance requirement that taxpayers must meet to qualify for the moving expense deduction, changes the classification of the deduction for moving expenses and restricts the types of expenses that qualify for deduction.
Deducting Moving Expenses
Taxpayers who qualify to deduct moving expenses incurred prior to January 1, 1994, must treat the expenses as an itemized deduction on Schedule A. Form 3903 must be filed to calculate the deduction. If the taxpayer is unable to itemize because the total expenses do not exceed the standard deduction for the year, the moving expense deduction is lost. For example, suppose a single taxpayer incurred $1,500 in moving expenses in 1993, paid $1,200 in state income taxes, and made a charitable contribution of $250. The taxpayer incurred no other costs that qualify as itemized deductions such as mortgage interest, medical expenses, or professional dues. Since the taxpayer's expenses total only $2,950, which is less than the $3,700 standard deduction for single taxpayers, the taxpayer will use the standard deduction and will lose the $1,500 deduction for his moving expenses.
Taxpayers who receive reimbursements for moving expenses incurred prior to January 1, 1994, must include the reimbursement in gross income as compensation for services. Amounts received in the form of money, the fair market value of property, or the fair market value of services are considered to be reimbursements. Therefore, if the taxpayer receives cash to pay for the costs of moving, has his moving expenses paid directly by his employer, or has his household goods moved by his employer using the employer's equipment, he is considered to have received a moving expense reimbursement.(1) The amount included as compensation will not be subject to withholding or treated as wages subject to FICA if the employer has a reasonable belief that the employee will qualify for the moving expense deduction.(2)
Income tax, social security tax and Medicare tax must be withheld from reimbursements that will not qualify for deduction either because the taxpayer will not meet the qualifying tests or because the expenses themselves will not qualify. Therefore, a taxpayer who is reimbursed by his employer but who is not able to itemize is doubly disadvantaged since he pays both income and FICA taxes on the amount spent on moving and receives no offsetting deduction.
Under the Revenue Reconciliation Act of 1993, taxpayers who qualify to deduct moving expenses incurred after December 31, 1993, will be permitted to deduct the expenses in computing adjusted gross income. The only moving expenses that will be deductible, however, will be those not paid for by the taxpayer's employer either directly or through reimbursement. Moving expenses that have been paid for by the taxpayer's employer will be excludable from gross income and from wages subject to withholding and FICA. …