Deduction of Expenses for Moving Abroad
Moving abroad to settle, start a new job, or establish a new business may help you save tax by getting some exclusion from US Expat taxes. Nonetheless, it will be quite complex to get exclusion on your move. You have to apply for it, and it would deem you good if you consult a tax professional so that you take the right steps to save tax. Do keep in mind that you can get the deduction for moving expense, only if the move that you make to a foreign country has some connection with a new job.
Requirements to meet
A US Expat has to meet certain criteria before they can qualify for deduction of moving expenses from their taxable income. The criteria are:
- Your move must be related to the start of a new job
- You must meet the distance test
- You must also pass the provisions of the time test
The Bona Fide Residence or the physical presence test must be met for a minimum of 120 days in the year you move. This is necessary in order for your moving expenses to be directly connected to your entire income earned that year. In case expats do not meet the bona fide residence test for a period of 120 days, the moving expenses are then connected to the income that you earn over a two-year period.
Allocation of moving expenses
Furthermore, moving expenses are allocated differently, depending on whether you moved to a foreign country form the US, or vice versa. If you moved to a foreign country from US, your moving expenses are allocated to two years; the year you moved, and the following year. If you move to the US from a foreign country, the moving expense is allocated to the year you moved, and the year before that.
It will be beneficial for you if you file an extension for your tax return starting from the year you move, and dating to the end of the second year of your move. This will get you an absolute figure for the deduction.
Deduction of expenses
- Travelling costs incurred to move from your last home to a new one. This includes lodging costs as well
- Shipment costs of moving your household belongings to your new home.
- Costs of carrying the household goods from the storage to your new home.
- Costs of storing your household belongings at a safe location while you indulge in your job
Expats must be informed that all the income they earn in a foreign country is related to the moving expenses that incur when you move. Hence, if you deduct a part, or all of your foreign earned income, under Foreign Earned Income Exclusion, or even the Foreign Housing Exclusion, you won’t be able to deduct the moving expenses that you allocate to the excluded foreign earned income.
Lastly, it is imperative that you inform the IRS before you move abroad. Update your address information with them, so that they are aware of your move, and know how to contact you. You can fill the Form 8822 to update your new address with the IRS.
Did you find the article useful for learning about what you should do in order to save tax when you move abroad? Share your opinions and thoughts with us in the comments below.