Sidney Kess
Sidney Kess ()

According to a study by United Van Lines, there is heavy migration within the United States, particularly among job seekers and retirees. For 2016, South Dakota topped the list of inbound states. On the list of outbound states, New Jersey was number one, New York number three, and Connecticut number four. In 2017, Florida is leading the list of inbound states. Each person has his or her own reason for relocating, but all face the same tax issues.

Deducting Moving Costs

If the relocation is because of retirement, health, or other personal reasons, no deduction can be claimed. But if the relocation is for a job or self-employment, a deduction can be taken for the cost of moving household items and members of the household (Code §217).

To qualify for the deduction, the taxpayer must meet two tests:

Distance test. The new workplace must be at least 50 miles farther from the taxpayer’s old home than the old job location was from the old home. If the taxpayer did not have a previous workplace (e.g., a recent college graduate), the new job location must be at least 50 miles from the person’s old home.

Time test. If the taxpayer is an employee, he or she must work full-time for at least 39 weeks during the first 12 months immediately following the arrival in the general area of the new job location. If the taxpayer is self-employed, he or she 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 immediately following the arrival in the general area of the new work location. There are exceptions to the time test, such as on account of death, disability, and involuntary separation from a job.

The deduction for moving a vehicle can be based on the actual expenses or an IRS-set mileage allowance. For a move in 2017, the standard mileage rate is 17 cents per mile (Notice 2016-79, IRB 2016-52, 918).

Federal Tax Issues

Because federal tax rules apply regardless of the state that the individual is in, the same rules apply.

State and local taxes. However, the deduction for state and local taxes may change with a move (Code §164). This is because a taxpayer who itemizes deductions must choose between deducting state and local income taxes or state and local sales taxes. In some cases, this choice is easy, such as moving from a state with a high income tax to a state with no income tax but a sales tax, (e.g., moving from New York to Florida).

In some cases, it is necessary to compare the amount of state and local income tax to a potential deduction for state and local sales tax so that the more favorable write off can be chosen. Typically, the latter is figured using IRS tables based on the number of people in the household and income.

Change of address. The taxpayer should inform the IRS of a change of address by filing Form 8822, Change of Address. If the taxpayer also relocates his/her business, file Form 8822-B, Change of Address or Responsible Party—Business.

Resident Versus Nonresident

If a person is moving from or to a state with state income tax, then a determination of residency is essential for state income tax purposes. Each state has its own rules for determining residency for its state income tax purposes. New York, for example, determines residency according to domicile (unless one of two exceptions applies) or the number of days the person is in the state. A person is a resident for New York income tax purposes if New York is the person’s domicile or the person maintains a permanent place of abode in the state for more than 11 months of the year and spends more than 183 days in the state.

States are aggressively looking at former residents who may erroneously be filing nonresident returns or failing to file at all. Usually these are individuals who continue to maintain a home within the state (e.g., snowbirds), as well as those who relocate during the year. Those who want to establish a change in residence should be prepared to show this with a change in voter registration, driver’s license, bank accounts, and other evidence. And they should carefully record travel dates in the state for purposes of the 183-day rule. Using apps, such as Monaeo can automatically log time spent in different states, providing support in case of a residency audit.

Relocating from one state to another and establishing domicile/residence there does not necessarily relieve the person of state income tax in the former state. Generally, a person who earns income within a state must file a tax return, whether or not a resident. Thus, a person who relocates from New York to New Jersey (establishes domicile in New Jersey) but continues to be employed in New York would have to file a New York nonresident income tax return and be taxed in New York on income earned in that state. Some neighboring states have reciprocal agreements that allow residents of other states to work in them without having to file a nonresident state income tax return. For example, a resident of Virginia who works in Washington, D.C. can file an exemption form with the D.C. employer to avoid paying taxes in D.C. In this instance, wages would be withheld for Virginia and a tax return filed for Virginia only. Other states with reciprocity include New Jersey with Pennsylvania.

Taxing pensions. Federal law bars a state from taxing a pension earned there once the person relocates to another state (Pension Source Tax Act of 1996, P.L. 104-94). Thus, if a person earns a pension in New York but relocates permanently to Florida, New York cannot tax the pension. The same is true for someone who earns a pension in California and then relocates to Nevada or Texas (no-income tax states). The term “pension” includes all types of qualified retirement plans, such as 401(k)s, as well as IRAs.

The no-tax rule does not apply to most nonqualified retirement plans, as well as stock options, stock appreciation rights, restricted stock, severance, sick leave, compensatory time and vacation pay.

Conclusion

On the Holmes and Rahe stress inventory, which is a list of the 43 stressful life events, a change in living conditions as well as a change in residence both make the list. From a tax perspective, moving presents some issues that need to be addressed.