If the transition to remote work due to the pandemic led you to flee a high-tax state and relocate to a state with a lower cost of living, there is a good chance you incurred moving expenses. Whether you moved yourself, had a moving service, or incurred hefty realtor fees, moving expenses can really add up. You may be wondering if you can write off those moving expenses on your tax return.
As of the Tax Cuts and Jobs Act that passed at the end of 2017, individuals cannot write off moving expenses unless they, their spouse, or a dependent are active-duty military (some states still allow for this deduction on state returns). If the company you work for covered your relocation and reimbursed your moving expenses, those funds will be included in your gross income for the year. This is important to keep in mind as you may have to set aside additional funds to cover the taxes that you now must pay on the reimbursed moving expenses.
If you are self-employed and moving your business to another state, you may be eligible to write off a portion of your moving expenses. If you have a home office, you are able to deduct the percentage that you use as a workspace. For example, if you use 5% of your home as office space strictly for business purposes, you can generally deduct 5% of moving expenses, including professional fees associated with the move (realtor fees). This also pertains to LLCs that operate from a home office and relocate.
Consider what to do with your newfound income
If you moved from a high-tax state to a state like Florida with no state income tax, you will likely be paying less in taxes. If you were able to maintain your salary, moving to a state with lower or no state income tax could save you up to 8.82% in taxes every year. This kind of savings will really add up, so what should you do with the extra income?
While it may be tempting to splurge, one secret of the invisible rich is that they put cash windfalls to work. Depending on your financial situation and goals, now might be a great time to max out your retirement contributions or open an IRA. If you have credit card debt, high-interest auto loans, or medical bills paying these down faster can allow you to focus on your savings sooner. If your retirement savings are right on track, and you have little to no bad debt, this could be the time to help your children save for their education with a 529 savings plan. These plans can offer tax benefits that vary by state. A financial advisor can help you to navigate these decisions and make a plan that suits your needs.
Be aware of state tax liability
Keep in mind that relocating to a different state or working remotely in a different state from the company office could trigger multiple states vying for your taxes. You may be required to file a tax return in multiple states. If you spend significant time working in a different state, we recommend you check in with your CPA to determine your obligation.
If you have moved or are planning to relocate this year, contact us for assistance with navigating any financial changes that come with the move. We may be able to identify opportunities for savings or tax planning.