The federal moving expenses deduction is one of the most widely recognized tax deductions. If your work required you to relocate, you may qualify to use IRS Form 3903 to claim the cost of your moving expenses as a deduction on your federal income tax return. To be entitled to claim a deduction on Form 3903, two tests must be met:
- Your new principal workplace must be at least 50 miles farther from your old home than your old workplace was; and
- You must work full-time in the general area of your new workplace for at least 39 weeks during the 12 months following the move (78 weeks during the 24 months after moving for self-employed individuals)
If you meet these tests, you can deduct the cost of moving your household goods and the travel costs associated with the move, including lodging. If you are driving as opposed to flying to your new residence, you can claim a standard mileage rate of 19 cents per mile.
New Jersey does not allow a moving expense deduction. However, if an employer includes a moving reimbursement in your taxable wages to compensate you for your costs to move your goods, and/or the travel costs associated with the move, the reimbursement is excludable from New Jersey taxation.
Selling Your Home
If you sold your principal residence in connection with your move, and the former residence was owned and used as your principal residence for at least two out of the five years preceding the sale date, up to $250,000 ($500,000 for a joint filer) of any gain is excludible from tax (federal as well as New Jersey). IRS Publication 523, Selling Your Home provides useful information on this topic. There is no longer the age threshold associated with the gain exclusion as there had been, dating back to 1997. If your former residence was sold at a loss – absent the residence having either been used for business purposes or rented in the past – the loss cannot be claimed.
Filing Resident / Nonresident State Income Tax Returns
When a taxpayer moves to a new state during the year, this often involves filing two part-year resident income tax returns. This will require income to be allocated to the two periods of residency, assuming both states impose an income tax. Many tax documents reporting income, such as W-2 forms, 1099 forms, and Schedule K-1s, will be issued for the entire year. A move to Florida, where there is no personal income tax, is an exception.
Depending on the circumstances, a move during the year may necessitate the filing of a nonresident state income tax return. For example, assume an individual lived in New Jersey and worked in New Jersey during the first half of 2016. On July 1, the individual moves to New York, but continues working in New Jersey. Here, the taxpayer would have to file three state income tax returns for 2016: a part-year New Jersey resident tax return for January-June, and both a part-year New York resident income tax return and a part-year New Jersey nonresident income tax return for July-December.
New Jersey – Pennsylvania Reciprocal Agreement
Aside from the general rule that an individual files a nonresident income tax return when employed in a state other than their resident state, the New Jersey – Pennsylvania reciprocal agreement stipulates that neither state will tax the wage income of nonresident employees. Under this agreement, which has been in place for 40 years, any New Jersey resident working in Pennsylvania has New Jersey taxes withheld from their wages, and they are not required to file a Pennsylvania nonresident income tax return. In September 2016, Governor Christie announced his decision to repeal this agreement, but reversed gears and reinstated the agreement two months later. So, this remains unchanged from past years.
Finally, changing your state of residence can have other tax ramifications such as estate and inheritance taxes. And don’t forget – state residents are often entitled to in-state college tuition discounts at state universities.