Updated: Feb 8, 2021
Are you contemplating a new life outside of California? You aren’t alone. 53% of Californians want to leave the state according to a survey conducted by Edelman Intelligence. Californians leaving for lower-tax jurisdictions such as Arizona and Texas has outpaced migration into California for the last eight years. Today I want to discuss a tax deduction that might benefit you whether you are moving domestically or internationally: the moving expense deduction. The deduction primarily applies to job-related moving expenses; regrettably, it can’t be utilized by individuals moving for retirement.
The moving expense deduction is unique to California. The federal deduction for moving expenses went away, with the exception of military personnel, in the 2018 Tax Cuts & Job Act (“TCJA”). California’s tax code does not conform to the TCJA.
There are three key tests you are required to meet before taking the deduction. First, the moving expenses must be within 1 year of the start date for the new position. You can’t claim a moving expense deduction this year for a job that you started 5 years ago. The other two tests, the distance test, and the time test require a little more explanation:
Your new workplace must be 50 miles further from your old house than your previous workplace. If you commuted 10 miles a day from your old house to your old job, then your new job must be 60 miles or more from your old house (10 miles old commute + 50 miles distance requirement). If you are self-employed and work from home, then your new house simply needs to be 50 miles or more from your old house.
You have to work 39 weeks during the first 12 months after arriving at your new location. You don’t need to have the same employer during those 39 weeks, and the 39 weeks don’t have to be in a row. The IRS allows for temporary absences due to illness, vacation, and off-season periods (e.g., summer break for teachers) to count towards the 39 weeks. If you are self-employed, then you must meet an additional time test: you also must work 78 weeks during the first 24 months after you arrive.
If you meet the three key tests, then you can deduct the reasonable costs of moving and storing your household goods as well as certain travel expenses for you and your family. Below is a list of potentially deductible expenses:
Shipping expenses for household goods and personal effects, including cars or pets;
Storage expenses, including the cost of shipping to and from the storage location;
The cost of traveling for you and your family members from your old home to your new home, whether by car, train or plane
Temporary lodging during the trip; and
The cost of connecting or disconnecting utilities.
I’ve referred to this as a tax deduction, but it’s technically an adjustment to your gross income. Unlike most deductions, it doesn’t get phased out above certain income thresholds. You don’t have to itemize deductions on Schedule A to benefit from it.
Let’s review two hypothetical examples to see who might qualify for this deduction:
Example #1 A teacher from Fresno, California moves to Chile and starts an organic gardening blog. The blog generates advertising revenue, which she supplements by teaching English as a second language. She likely would be eligible for the moving expense deduction.
Example #2 An engineer from Yorba Linda, California moves to Arizona. He works a few hours a week as a handyman in the condominium complex where he lives. The government does not consider a person as self- employed if he is semi-retired, a part-time student, or working only a few hours each week. He would not be eligible for the moving expense deduction.
In today’s connected world, many service-related professionals can perform their jobs remotely. Maybe you can provide quality service to your clients through video conferencing rather than face-to-face meetings. Maybe at the end of the day, you’d rather watch the sunset from a seaside villa than sit in a 60-minute, rush-hour commute. If so, remember that the Golden State is willing to effectively subsidize certain job-related moving expenses. Think of the moving expense deduction as a sales discount on your shipping and travel costs.
If you believe you qualify for the moving expense deduction, I encourage you to speak to your tax preparer or read IRS Publication 521, Moving Expenses. IRS Publication 521, Moving Expenses, explains in detail all of the “if’s, and’s or but’s” to the general overview I’ve provided in this article. Any time you move, make sure you or your tax preparer fill out Form 8822, Change of Address, and California Form 3533, Change of Address for Individuals. You wouldn’t want the IRS to send a refund or, worse yet, an audit request to your old address.