The immediate rigors of relocation include so many potential aspects for most people: the details of the move itself; a new professional position or location to navigate; personal belongings large and small; emotions; a family's upheaval and new schools; a new climate; a new area of the country or even a new country. Each of these items are difficult enough that the last thing anyone facing relocation wants to do is think about the tax implications.
Whether you relocate for your current company or move elsewhere for a new business, The Dolins Group tax specialists offer up-to-the-minute tax preparation and related services for both individuals and families who relocate within the U.S. and abroad. The The Dolins Group staff is proficient in complicated and little-understood tax law affecting relocation.
We consider it our job to save you money, time, frustration and future complications.
Once you're faced with your taxes, you'll learn that the Internal Revenue Code is full of complex rules and regulations that affect relocating individuals. And tax law has changed. Even if you've understood the tax landscape locally, when you file your tax returns after a move, you'll find you there are many tax implications of relocation that you likely didn't predict. These may involve how an employer's relocation disbursement affects your taxes and whether it puts you into a higher bracket; new deduction rules; pre-moving expense tax changes; temporary relocations; residing in two locations.
Tax implications are even more complicated when relocating abroad. The U.S. has tax treaties with over 60 other countries. A tax treaty typically includes provisions that can benefit any U.S. taxpayer. Among these provisions is the elimination of double taxation of your income by both countries via foreign tax credits.
The following are several common relocation scenarios that begin to educate you and to illustrate the kind of knowledge and solutions The Dolins Group can provide for you: Do you qualify for the moving tax deduction?
If you moved due to a change in your position or business location, or because you started a new job or business, you may be able to deduct your reasonable moving expenses but not any expenses for meals. To qualify for the moving expense deduction, you must satisfy two tests. Under the first test, the "distance test", your new job must be at least 50 miles farther from your old home than your old employment location was from your old home. If you had no previous workplace, your new job must be at least 50 miles from your old home.
The second test is the "time test". If you're an employee, you must work full time for at least 39 weeks during the first 12 months right after you arrive in the general area of your new job. If you're self-employed, you must work full time for at least 39 weeks during the first 12 months and for a total of at least 78 weeks during the first 24 months after you arrive in the general area of your new work location. There are exceptions to the time test as in cases of death, disability and involuntary separation.
The moving deduction can be significant, but the IRS has become somewhat less generous recently. Now you're limited to the following deductions: the cost of packing and shipping your possessions, including insurance and up to 30 days of storage; the cost of traveling to your new home (once), including lodging but not meals (you can also deduct your actual driving costs, like gas and oil, or a whopping 24 cents a mile for the drive for 2009 or 16.5 cents per mile for 2010); and finally, the cost of disconnecting utilities at your old home and hookups at the new home.
Unfortunately, the list of what's not allowed is much longer. It includes expenses incurred buying or selling a home or acquiring or breaking a lease, apartment security deposits, losses from selling or giving up club memberships, and driver's license and car registration fees. Whereas in the past you could have deducted expenses incurred while you were house hunting, this is no longer allowed.
Remember, though, if any of the preceding items is used for business, you might be able to deduct some of these amounts as business expenses.
There are two ways for your company to pay your moving costs. It can give you tax-free reimbursements for the amounts you could have deducted yourself (see list above), or it can add the reimbursement to your salary.
If you do get reimbursed for some or all of your moving expenses, be cautious about double dipping: you're not allowed to deduct moving costs if they're paid by your employer.
When there's a move during the year to a new state, typically the relocating household will be required to file part-year resident tax returns to their old state and to their new state. Naturally, preparing part-year resident tax returns are more complicated than preparing a full-year resident tax return.
Here's an example: In 2009, Brian was offered a promotion with his employer. The new position was located in New York City and Brian then lived and worked in Chicago. Brian accepted the new position and chose to live in New Jersey and commute to New York City.
Brian is a smart guy who had previously prepared his own tax returns. He decided to prepare his own 2009 tax returns using tax preparation software he purchased online. Brian did prepare an accurate federal tax return and properly deducted his unreimbursed moving expenses. The more complicated issue Brian faced was with his state tax filings. To his credit, he did prepare a part-year Illinois tax return, a part-year New Jersey tax return and even a non-resident New York state tax return.
Brian was on the right track, but there were problems with the state tax filings. It started with a letter from New York state explaining there were problems with his tax return. Brian decided it was time for professional assistance and came to us.
In reviewing Brian's tax returns and the letter from New York we discovered some problems with the New York and New Jersey state income tax returns he prepared. Since Brian worked in New York City, he was subject to non-resident income tax in both New York City and the state of New York. Brian's New York tax return did not include the New York City tax. This resulted in a refund considerably less than he expected.
The second problem we discovered was that Brian did not claim a credit for taxes paid to New York State on his New Jersey tax return. This omission resulted in Brian overpaying almost $7,000 in tax to New Jersey. New Jersey didn't catch this error. We prepared an amended New Jersey tax return and got a refund for Brian for the taxes overpaid to New Jersey.
Even smart people using tax preparation software make mistakes on their tax returns. Most tax software can prepare an accurate tax return, but as software, lacks the finesse and judgment needed to interpret tax law.
When assigned to an overseas location, the U.S. tax code requires that all its citizens report their worldwide income on their U.S. income tax return, no matter where they reside. Most of the U.S. tax treaties with foreign countries prevent an employee from incurring double taxation on their earnings.
In 2007, Roger's employer asked him to work in Dubai. Roger was excited to leave Birmingham, Alabama to work abroad. He understood he was required to file a U.S. income tax return and found a fellow expatriate who happened to prepare tax returns for other U.S. citizens working in Dubai.
Roger engaged this person to prepare his 2007, 2008 and 2009 tax returns. Roger was concerned that the returns weren't quite right. So when he returned to the U.S., he engaged The Dolins Group to review them. We discovered that Roger overpaid U.S. income tax each of those years because his tax preparer did not file Form 2555 to compute the Foreign Earned Income Exclusion. The mistake meant that Roger over-reported his income by over $200,000 and overpaid U.S. income tax by over $50,000!
We also identified a quirky issue which many tax professionals don't know. Roger was required to file tax returns to the state of Alabama for all three years he was in Dubai. Alabama considers any resident who accepts employment in a foreign country with the intent of returning to the U.S. to have all their income be subject to Alabama income tax. This is even true if the taxpayer leaves no property in Alabama.
Most states don't have this provision in their tax code and Roger's tax preparer in Dubai was not aware of it. We did prepare Roger's Alabama tax returns and he was required to pay the back taxes, interest and penalties. All of this would have been avoidable had Roger worked with a truly qualified professional totally schooled in the wide-ranging complexities of U.S. tax law.
If your assignment or job away from your main place of work is temporary, your tax home does not change. United States tax law considers you to be away from home for the whole period you're away from your main place of work. You can deduct your travel expenses if they otherwise qualify for deduction. Generally, a temporary assignment in a single location is one that is realistically expected to last, and does in fact last, for one year or less.
However, if your assignment or job is indefinite, the location of the assignment or job becomes your new tax home and you cannot deduct your travel expenses while there. An assignment or job in a single location is considered indefinite if it is realistically expected to last for more than one year, whether or not it actually lasts for more than one year. If your assignment is indefinite, you must include in your income any amounts you receive from your employer for living expenses, even if they are called travel allowances and you account to your employer for them. You may be able to deduct the cost of relocating to your new tax home as a moving expense. Kathy is an information technology professional for a large consulting firm. There are times when Kathy's work assignments require her to travel out of town. Some of these assignments last several months. Kathy's employer provides her with a per diem amount for the days she's away from home. The per diem amount she receives is based on the federal rates established by the U.S. General Services Administration. The per diem is intended to cover lodging, meals and incidental expenses while Kathy is away from home.
Kathy has a neighbor who looks after her home while she's out of town. The neighbor prepares her own tax returns. As a helpful gesture, Kathy's neighbor offered to prepare her 2008 tax returns while she was out town. Kathy happily accepted this offer. During 2009, Kathy started receiving letters from taxing authorities from states in which she worked on temporary assignment. Kathy's employer properly withheld income taxes from her paychecks for the states in which she worked on temporary assignment. Kathy's neighbor was mystified as to why she would be getting letters from these states because Kathy lived in Illinois.
Kathy's neighbor said, "You can't possibly be subject to income tax in state where you don't live." Kathy inquired with her human resources department and learned she did have a tax filing obligation in these other states. Kathy spoke to a co-worker who is a client of The Dolins Group and referred Kathy to us.
We reviewed Kathy's 2008 tax returns and prepared the state tax returns Kathy's neighbor thought unnecessary. In reviewing Kathy's federal income tax return we also identified other errors which resulted in Kathy overpaying her federal income tax. It turned out Kathy's neighbor reported the per diem payments as taxable income. According to the neighbor, "If you receive monies from your employer, it is taxable."
But the per diem was not taxable. Per diem payments are generally not taxable as long as the recipient uses a substantial portion for travel expenses while away from home. The result was Kathy's 2008 tax return overstated her income by nearly $30,000 and created additional federal income tax of $6,500.
Kathy kept meticulous records of her travel expenses and she actually spent more than the per diem she was provided. These excess expenses are deductible and were also included on the amended tax return prepared by The Dolins Group.
The nuances of federal and each state's tax codes in regard to relocation are complex, indeed. The personal relationships The Dolins Group staff create ensure that each client's situation is so thoroughly mastered that all applicable tax law is employed to the most advantageous effect for our clients. Relocation is a big deal.
If you're relocating or have relocated, do contact us to prepare your returns. Or you may contact us when you know you're relocating and we will anticipate your tax needs, educate you about the tax laws that affect you, and employ the best tax strategies for your benefit.