Moving house is often one of the biggest financial hits most people ever have to take. It’s not only financially draining but it’s also time-consuming. That’s why taxpayers every year look to deduct their moving expenses and try to reduce their tax liability.
Unfortunately, the Tax Cuts and Jobs Act – which was passed in 2017 – changed the rules for writing off moving expenses. Most people now can't claim a deduction when they relocate – and this act is set to stay until 2024. However, if you serve in the military, you can qualify for the moving expenses tax deduction.
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According to the IRS, moving expenses are costs that you incur when you relocate for a new job. They’re deductible if they’re ‘reasonable’ and ‘necessary’ expenses for relocating yourself, your family, and your possessions.
These reasonable moving expenses can include:
In the past, moving expenses were part of above-the-line deductions. They allowed taxpayers to reduce their taxable income, without even itemizing their deductions. You’d recoup any money you spent when moving for a job, and after writing off the expenses, you could still claim the standard deduction.
But that’s until the Tax Cuts and Jobs Act (TCJA) came into play and suspended the moving expense deduction. Many taxpayers now don’t get to recoup the costs of moving for work or looking for new jobs.
The only ways to do so are:
Military personnel can deduct moving expenses if they’re on active duty and their move was because of a Permanent Change of Station (PCS) or due to deployment orders.
Here’s what a permanent change of station includes:
Members of the armed forces need to use Form 3903 to report moving expenses when filing their federal tax returns. Here’s an overview of the tax form:
If you meet the IRS qualifications for this deduction for multiple moves, you can use separate Form 3903s for each move you make.
Note that the spouses or dependents of any imprisoned, deceased, or deserted military personnel can also qualify for the deduction.
As we’ve previously mentioned, only taxpayers who relocated in 2017 – before the Tax Cuts and Jobs Act came into place – can deduct their moving expenses.
The IRS rule is that you can amend the returns you filed within a timeframe of three years. Alternatively, you can also do so if two years haven't passed since you last paid taxes on the returns you filed – whichever is later.
That said, you need to meet three conditions to qualify for the moving expenses write-off:
The IRS gives you a timeframe of one year from the time you relocated to the first time you reported at your new job to meet this condition. For instance, let’s say you relocated from City A to City B on August 10. The first time you reported for work was October 20th. In such a case, you started working after 2 months, so you meet the “closely related to starting work” condition.
Even if the sequence of events was reversed, you’d still meet this condition. Let’s say you started working in City B on June 1. You then had to bring all your possessions from City A to City B on September 1. You’ll still meet this test because you moved within one year from the day you reported for work at your new job location.
The distance between your new work location needs to be more than 50 miles if you compare it to the distance between your previous job and your old home.
For instance, if your previous workplace was 20 miles from your old residence, then your new job needs to be at least 70 miles from your old home to meet the distance test.
If you previously didn't have a workplace, then your new job needs to be 50 miles further from your former home.
If you don’t move 50 miles further, then you need to prove to the IRS that your relocation was necessary for your line of work and that a closer residence will save you more time and money.
The IRS requires you to work full time for more than 39 weeks out of the first year that you stay at your new home for you to pass the time test. Note that these weeks don’t need to be continuous and you don’t have to be working for the same employer. The only condition is that you need to remain in the same commuting area.
If you’re self-employed, then the time frame doubles. So you’ll have to work full time for more than 78 weeks out of the first 2 years after your move.
One thing you need to know is that married couples who file their returns jointly still need to pass these tests, but they can do so individually. For instance, one of you can meet the distance test, and the other one can pass the time test. However, you can’t add your time together to pass the time test. One of you needs to work for more than 39 weeks in the first year, or 78 weeks in the first two years if you’re self-employed.
Some expenses don’t qualify you for the federal moving expense deduction, and they include:
For many taxpayers looking to relocate, the changes from the Tax Cuts and Jobs Act can be a twofold blow. The IRS now considers any money you’re reimbursed by your employer for moving house as taxable income. And your employer can’t claim any reimbursed moving expenses as a tax write-off, too.
So these expenses won’t help reduce your tax bill – you may even have a higher tax bill at the end of the year after your employer has covered the costs of your relocation.
Luckily, some employers are now considering “grossing up’’ to ease their employee’s tax burden. What this means is that your employer can give you more money than what’s needed to pay the extra taxes you’ll incur for receiving moving expense reimbursements.
Consider negotiating for a “gross-up” to counteract the fact that reimbursements are taxable.
Even though the federal government suspended the write-off for moving expenses back in 2017, some states still allow taxpayers to claim the moving tax deduction when they file their state tax returns.
Some of these states include:
Note that the rules in some of these states vary. For instance, New York still allows the relocation expense tax deduction and excludes reimbursements for moving expenses from income in state returns.
Always consult with your tax advisor to understand your state's rules and regulations, as they’re often changing.
Most people often donate things they no longer use before moving out. This is a great strategy to reduce the number of valuables that you need to pack and transport.
The good news is that the IRS allows you to write off up to 60% of your adjusted gross income (AGI) through charitable donations. You can even deduct up to 100% of your AGI if you make your donations in cash.
The IRS, though, can also limit you to 20%, 30% of 50% of AGI, depending on the organization you contribute to – contributing to some private foundations, fraternal societies, and cemetery organizations can limit your deduction.
Even if you exceed your limit, you can still deduct the remaining amount over a period of 5 years through the “carryover” process.
Remember to always document your donations, no matter the amount you are contributing. If you’ve contributed in cash, some of the qualifying documents can include:
If the donation was an automatic withdrawal from your payroll through your employer, then you can store the copies of your W-2 form, or any pay stubs that show how much you donated and the date you contributed to an organization.
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?