Can I deduct 2018 moving expenses on my federal return?
The bad news is, under the 2018 Tax Cuts and Job Act (TCJA) the moving expenses deduction has been eliminated. Moving expenses include the costs of moving your household goods and personal effects, and travel costs to your new home. If you moved in 2017 (or in previous years) and your employer didn’t cover or reimburse moving costs, those expenses were deductible depending on the distance your new work location was from your previous home.
The only exception to this deduction elimination is for active members of the military moving due to a military order. Active military members moving for work can still deduct moving expenses.
What if I moved in 2017?
The good news is, if you moved to a new home in 2017 and were reimbursed by your employer in 2018, the reimbursement will not be taxed as income.
This TCJA change affects all citizens filing tax returns in 2018 (other than active military) and is in effect for tax years beginning after December 31, 2017. Though the law is supposed to remain in effect through December 31, 2025 but could be changed via additional legislation.
What strategies mitigate the impact of the lost deduction?
The first potential mitigation strategy is: research the state you’re moving to. Some states still allow moving exemptions. Whether your state allows moving expenses to be deducted depends on whether the tax laws there automatically update when federal tax laws change, whether legislation must be passed to update them, and whether you’ve moved to a state that chooses to pass new laws but change certain rules regarding deductions.
In New York, for example, state tax code updates automatically when IRS rules change. However, the state passed a law after tax reform specifying that certain provisions of the TCJA would not be incorporated in New York — including the suspension of the moving expenses deduction. It’s important to research. For example, if tax laws in a state are not favorable for you, perhaps that can be leveraged to strike a better bargain with your new employer.
Assuming the state you are moving to upholds elimination of this deduction, time-honored ways to save money on moving include: move as much as possible on your own, bring in the moving crew only for larger items and boxes, and schedule your move at a low demand time for movers (like the middle of the month).
How might moving affect my state taxes?
State taxes and rules on moving differ. Moving affects your overall tax and financial picture, and that’s worth consulting a tax professional. As always, we’re here to help.
For example, let’s say you’re renting out your house in your old state while establishing permanent residency in your new state. It’s likely you’ll have to file an income tax return in your new state and your old state to report income and expenses from the rental. You’ll also want to verify that your new state gives you credit for taxes paid on the rental income to your old state.
If your rental property shows a loss, and you’re not required to file a tax return on it in your old state, you may want to file the loss via return regardless. Why? This allows you to establish that the rental produced a taxable loss which you can carry over to offset future taxable rental income from your old state in the future.
What about interest and dividend income in my old state?
Dividend and Interest income is usually taxable by the state where you’re a permanent resident. For example, if you move permanently from Colorado to California, California will tax you on the interest income from your Colorado bank accounts during the time you’re a resident of California, but Colorado won’t tax you for the same period. If you still have a business in your old state, both states will tax the income. Then you must apply for a credit on your new state’s tax return.
Most states start with your federal Adjusted Gross Income (AGI) to determine taxable income. But again – research is key. Know how your new state handles tax-related areas, such as itemized deductions, interest and dividend income before moving.
Does moving to a new state affect investment income?
Sadly some investments that are tax-exempt for your old state may be taxable in your new state. Let’s say you’re in North Carolina and hold municipal bonds from one of the agencies of the state. As a permanent resident of North Carolina, you won’t pay tax on that income. But if you move to Idaho and own the same bond you’ll pay Idaho income tax on the income. That’s why it’s so important to examine financial portfolio issues before moving.
What about retirement income?
Most states that collect income tax also tax retirement income. Methods used to determine retirement tax varies from state to state. If you are receiving retirement income from a business in your old state but move to a new state, federal law says that your new state can tax your retirement income, but your old state can’t.
Some states provide a fixed amount that you can subtract from your retirement income, and others don’t tax pensions at all. For example, depending on your age, Utah has a set amount you can deduct from retirement income. Louisiana doesn’t tax pensions received by state and local government employees at all, and provides a break for private pensions, too.