Our firm recently moved into a larger location, so I thought now would be a convenient time to discuss the different ways that moving can affect your taxes in the United States.
Moving to a new home can be an exciting adventure, whether you're upgrading to a larger space, downsizing, or relocating for a job. However, beyond the logistics of packing and settling in, moving can also have significant implications for your taxes. Understanding these impacts can help you make more informed decisions and potentially save money when tax season rolls around. Let's dive into the various ways moving can affect your taxes in the United States.
1. Change in State Tax Obligations
One of the most significant tax changes occurs when you move from one state to another. Each state has its own tax laws, and your tax liability can vary greatly depending on where you live. Here are some key points to consider:
State Income Taxes: Not all states levy an income tax. For example, Florida, Texas, and Nevada do not have a state income tax. Moving from a state with a high income tax rate to one without can result in substantial tax savings.
State and Local Sales Taxes: Sales tax rates can differ between states and even between cities within the same state. This can affect your overall cost of living and your disposable income.
Property Taxes: Property tax rates are set at the local level, meaning they can vary significantly within a state. When buying a new home, it's crucial to research property tax rates in your new area, as this will impact your annual expenses.
2. Deductions and Credits for Moving Expenses
The Tax Cuts and Jobs Act of 2017 made significant changes to the deductibility of moving expenses:
For Military Personnel: Active-duty members of the armed forces who move due to a military order can still deduct their moving expenses. This includes costs such as transportation, lodging, and shipping household goods.
For Other Taxpayers: The moving expense deduction was eliminated for most taxpayers through 2025. This means that, unless you are in the military, you cannot deduct moving expenses on your federal tax return.
3. Impact on Home Sale Capital Gains Exclusion
If you sell your home as part of your move, you may be eligible for the home sale capital gains exclusion:
Primary Residence Exclusion: If you've lived in your home for at least two of the five years before selling, you can exclude up to $250,000 of capital gains ($500,000 for married couples filing jointly) from your taxable income. This can be a significant tax benefit when selling your home at a profit.
Partial Exclusion: If you haven't met the two-year residency requirement, you may still qualify for a partial exclusion if the move was due to a change in employment, health reasons, or other unforeseen circumstances.
4. State Residency Rules and Dual Residency
When you move, you need to establish residency in your new state and may need to deal with dual residency issues:
Establishing Residency: Each state has its own rules for establishing residency, often involving registering to vote, obtaining a driver's license, and proving physical presence. Establishing residency in a state with lower taxes can be beneficial but requires meeting specific criteria.
Dual Residency: If you maintain residences in two states, you may be subject to tax laws in both. Some states have agreements to prevent double taxation, but it's essential to understand your obligations in both states to avoid unexpected tax bills.
5. Job-Related Moving and Employer Reimbursements
If you move for a new job or a job transfer, your employer may offer a moving reimbursement:
Taxable Reimbursements: As of 2018, employer reimbursements for moving expenses are considered taxable income. This means you'll need to report these reimbursements on your tax return, and they may increase your tax liability.
Gross-Up Payments: Some employers provide "gross-up" payments to cover the additional taxes incurred due to moving reimbursements. Ensure you understand how your employer handles moving reimbursements and factor this into your financial planning.
Conclusion
Moving can have a myriad of effects on your taxes, from changes in state tax obligations to the deductibility of moving expenses and implications for home sale capital gains. Being aware of these potential impacts can help you plan your move more effectively and avoid unpleasant surprises come tax season. Always consider consulting with a tax professional to navigate the complexities of tax laws and ensure you make the most of any available tax benefits when relocating.
Comments