Moving for a Job: Tax-Deductible Expenses & Relocation Assistance

Did you move to take a new job this year, or are you considering moving for work soon?

According to the U.S. Census Bureau, just over 12% of the more than 32 million people who relocated in 2019 did so because of a new job or job transfer. If you’re one of them, you may have heard moving expenses are tax-deductible and want to know how you can benefit.

Unfortunately, thanks to the Tax Cuts and Jobs Act (TCJA) of 2017, moving expenses are no longer deductible for most people. However, the deduction is still available for some taxpayers, and there are other ways to offset the cost of moving. But how you offset your expenses depends on whether you’re filing under the old rules or new rules.

Deducting Moving Expenses: The Old Rules

For 2017 and prior, taxpayers can deduct moving expenses if they meet the following requirements:

  • Related to the Start of Work. The move must be related both in time and place to the start of work in a new location. Relocating expenses incurred within one year from the date you report to work are generally considered to be related in time. Expenses are related in place if the distance from your new home to your new job is not greater than the distance from your old home to your new place of employment.
  • Distance Test. Your new job location must be at least 50 miles farther from your former home than the distance from your former home to your former job. If you did not have a job, then the new place of employment must be at least 50 miles from your former home.
  • Time Test. There are different time tests if you’re an employee versus self-employed. If you’re an employee, you must work full-time for 39 weeks in the first 12 months following your arrival in the area of your new job. If you’re self-employed, you must work 39 weeks in the first 12 months and 78 weeks in the first 24 months following your arrival in the area of your new work location.

Note: If you’re married and filing a joint return, either you or your spouse can meet the time test, but you cannot meet the test by adding your weeks of employment to your spouse’s weeks of employment.

Exceptions to the Time Test

There are several situations in which you do not need to meet the time test, including:

  • Your primary job location was outside the U.S., and you moved to the U.S. because you retired.
  • You are the survivor of someone who worked abroad at the time of their death, and you moved to the U.S.
  • Your job in the new location ends because of death or disability.
  • Your employer transfers you for their own benefit or terminates your employment for a reason other than willful misconduct as long as you were working full time and expected to be employed long enough to meet the time test.
  • You are in the U.S. armed forces, and you moved because of a permanent change of station. A permanent change of station includes moving from your home to your first post of active duty, from one post of duty to another, or from your last post of duty to your home or a nearer point in the U.S. This definition applies whether military members buy or rent a home.

Deductions You Can Take Under the Old Rules

For moves in 2017 and earlier, if you met the above tests, you can deduct the following expenses:

  • Moving your household goods and personal effects, including packing, crating, and transporting as well as in-transit storage
  • Connecting or disconnecting utilities
  • Shipping your car or pet
  • Traveling (transportation and lodging, but not meals) to your new home (as long as you travel by the most direct route). The IRS doesn’t consider side trips for sightseeing or visiting relatives or friends part of the move. If you drive your own car, you can deduct either actual expenses (if you keep an accurate record) or a standard mileage rate. For 2017, that rate is 17 cents per mile driven. With either method, you can also deduct tolls and parking expenses. You cannot deduct general auto repairs or maintenance, insurance, or depreciation.

If your employer reimburses any of the above expenses and does not include the reimbursement as taxable income on your W-2, you cannot deduct those expenses on your return. Similarly, if your employer reimbursement is greater than the cost of your move, you must include the excess in your taxable income.


Deducting Moving Expenses: The New Rules

The TCJA suspended moving expense deductions for tax years 2018 through 2025 for all nonmilitary taxpayers. Active-duty military members who move due to a permanent change of duty station can still deduct moving expenses. A permanent change of station includes a move from your home to your first post of active duty, from one post of duty to another, or from your last post of duty to your home or a nearer point in the U.S. If you use your own car to drive yourself, members of your household, or your personal effects to your new home, you can either deduct actual expenses or a standard mileage rate of 17 cents per mile (for 2020 moves).

If you qualify, use Form 3903 to calculate your moving expense deduction. If you need help determining whether you can deduct your moving expenses, check out the IRS moving expenses deduction tool.

Also, while the federal government has suspended the deduction for moving expenses, some states still allow taxpayers to claim a deduction on their state income tax returns, so check the state tax laws where you live. The American Institute of Certified Public Accountants maintains a list of each state’s department of revenue.


Employer Reimbursements for Moving Expenses

Some employers offer relocation assistance to help existing employees relocate to a new city for work or to woo talent from outside their geographic area. However, this form of employee benefit is not very common.

According to the Society for Human Resources Management, only 34% of employers offered a lump-sum payment toward moving expenses to employees in 2019. And only 18% reimbursed the cost of shipping an employee’s household goods.

Before 2018, an employer could pay for or reimburse an employee’s qualified moving expenses. The payment was a tax-free fringe benefit, meaning they didn’t include it in the employee’s taxable income for the year. However, under the TCJA, employers must now include all moving expenses in an employee’s wages, and the payments are subject to income and employment taxes. Members of the U.S. armed forces can still exclude qualified moving expense reimbursements from their income if:

  • They are on active duty
  • They move pursuant to a military order and incident to a permanent change of station
  • Their moving expenses would qualify as a deduction if they didn’t get a reimbursement

In light of the deduction changes, it’s a smart move to negotiate a relocation package from your employer whenever possible. According to HomeAdvisor, a cross-country move typically costs anywhere from $2,417 to $6,211, depending on the size of your home and how far you’re moving. It can cost even more if you hire a moving company to handle everything from packing and cleaning to unpacking boxes in your new home.

If your employer is willing to reimburse those costs, you’ll pay income and payroll taxes on the reimbursement, but you’ll still be better off than you would be if you covered the entire cost out of your own pocket.

Plus, some employers will “gross up” their moving expense reimbursements to counteract the fact that reimbursements are now taxable — meaning they’ll give an employee more money than necessary for the move to cover the added taxes.


Final Word

Moving is a hassle, and with moving expenses no longer providing a tax break for most taxpayers, there’s less incentive to relocate for a new job — at least for now. However, both the moving expense deduction and the moving expense reimbursement exclusion are set to return as of Jan. 1, 2026, as long as Congress doesn’t decide to make the change permanent.

In the meantime, you can still take steps to save on your move by doing most of the work yourself and shopping around to compare prices. And don’t forget to negotiate a relocation package from your employer. That’s money in your pocket, even if the government takes a cut.

For more tax advice, check out our complete tax filing guide.

Did you move to take a new job this year? Did your employer offer relocation assistance, or did you cover the costs on your own?

Source: moneycrashers.com

Backdoor Roth IRA – Definition & How to Make These Contributions

Saving for retirement is important for everyone. It’s difficult to live off Social Security benefits alone, so most people will need to supplement their retirement income with their own savings.

Many people have access to retirement plans like 401(k)s through their employers. If you don’t have access to a 401(k), or simply want to save more or have more control over your retirement savings, you might consider opening an Individual Retirement Account (IRA).

An IRA is a special type of account that is designed for retirement savings. You can open IRAs at many banks and with most brokerage companies. If you put money in an IRA, you can receive tax benefits, but you also restrict your ability to withdraw that money.

One drawback of traditional IRAs and Roth IRAs is that they limit the amount that you can contribute and exclude some people from contributing based on their income. However, there are ways to get around these limits.

What Is a Roth IRA?

For Roth IRAs, you pay taxes as normal when you contribute money to the account. However, withdrawals from the account are completely tax-free. That means you don’t have to pay any tax on your investment gains or dividends you receive in the account.

This can save you a lot of money in taxes compared to investing in a taxable brokerage account.

For comparison, a traditional IRA lets you deduct your contributions from your income, reducing your income tax bill immediately. However, you have to pay income tax on all the money you withdraw, including earnings, meaning you are deferring your taxes to a later date.

Roth IRAs are designed for retirement savings, so there are rules about withdrawing from the account.

Because you’ve already paid taxes on the money you contribute to a Roth IRA, you can withdraw contributions without penalty or taxation. However, the earnings in the account — the gains from your investment activities — are subject to penalties if you withdraw them before you turn 59 ½.

If you’ve had the account open for fewer than five years, you have to pay a 10% penalty and income tax on any earnings you withdraw. If you’ve had the account open for at least five years, you may be able to avoid taxes but will have to pay the 10% penalty on early withdrawals.

In some situations, such as paying for a first-time home purchase or paying for medical expenses, you may be able to avoid these taxes and penalties.

Once you turn 59 ½, you can make withdrawals from the account freely as long as it has been open for at least five years.


Roth IRA Contribution and Income Limits

The government places limits on the amount of money that you can contribute to a Roth IRA each year. The limits are based on your age and your income.

In general, for 2020, you can contribute up to the lesser of your taxable income for the year or $6,000. If you are age 55 or older, you can contribute an additional $1,000.

If you have a high enough income, the amount that you can contribute will begin to decrease until it reaches $0. The income maximum varies depending on your filing status.

Full Roth IRA Contribution Allowed Partial Roth IRA Contribution Allowed No Roth IRA Contribution Allowed
Single or Head of Household tax filing status Earned less than $124,000 Earned $124,000 to $138,999 Earned $139,000 or more
Married, filing separately tax filing status, did not live with spouse during the year Earned less than $124,000 Earned $124,000 to $138,999 Earned $139,000 or more
Married, filing separately tax filing status, did live with spouse during the year Earned less than $10,000 N/A Earned $10,000 or more
Married, filing jointly, or qualified widower tax filing statuses Earned less than $196,000 Earned $196,000 to $205,999 Earned $206,000 or more

These income limits use your modified adjusted gross income (MAGI), which is your gross income minus certain deductions such as contributions to employer retirement plans and student loan interest.


What Is a Backdoor Roth?

A backdoor Roth is a strategy people use to get around the income limits on Roth IRA contributions by contributing to a traditional IRA and then converting the balance to a Roth IRA.

Imagine that you’re fortunate enough to have an income of $150,000 as a single person. You probably have a good amount of money to invest for retirement, but the government won’t let you contribute to a Roth IRA.

You can use a backdoor Roth to get funds into your Roth IRA without breaking the income maximum rules. Traditional IRA contributions, unlike Roth IRAs contributions, are not limited by your income.

That means that you can contribute money to a traditional IRA no matter how much you make, and then roll those funds into a Roth IRA.

Pro tip: Have you considered hiring a financial advisor but don’t want to pay the high fees? Enter Vanguard Personal Advisor Services. When you sign up, you’ll work closely with an advisor to create a custom investment plan that can help you meet your financial goals.


How to Make Backdoor Roth Contributions

Making a backdoor Roth contribution is relatively easy.

1. Contribute to a Traditional IRA

To start, contribute the amount that you want to put in your Roth IRA to a traditional IRA.

When you contribute money to a traditional IRA, you can usually deduct those contributions from your income when you file your tax return. However, like Roth IRAs, there are income maximums for deducting traditional IRA contributions.

If you make more than the maximum allowed, you can still contribute to a traditional IRA, but you cannot deduct that contribution from your income when filing your tax return.

Because you’re rolling your money into a Roth IRA anyway, you’ll have to pay taxes, meaning you don’t have to worry about making too much to take the deduction.

2. Roll Your Traditional IRA Into a Roth IRA

Once you’ve contributed to an IRA, you want to roll that money into a Roth IRA.

A rollover lets you convert some or all of your traditional IRA balance into a Roth IRA balance. In effect, you can completely dodge the income limit for Roth IRA contributions using this strategy. Your broker can typically help you with the rollover process, making it relatively easy.

When you roll your traditional IRA’s balance into a Roth IRA, you pay income taxes on the amount you roll over.

The Pro-Rata Rule

Before you make a backdoor Roth contribution, you need to keep in mind one rule surrounding traditional IRAs and rollovers: the pro-rata rule.

To understand the pro-rata rule, picture your traditional IRA as having two buckets. One bucket includes money you deducted from your income and thus haven’t paid taxes on yet. The other includes money you contributed that you could not deduct from your income, possibly because you made too much money that year.

You need to track the buckets separately because although you have to pay income tax on pre-tax contributions when you withdraw them, you don’t have to pay them on post-tax contributions. If you did, you’d be paying taxes on the same income twice.

The pro-rata rule states that you must roll a proportional amount of each bucket into a Roth IRA when performing a rollover, meaning you can’t choose which bucket of money to roll over. This can have significant tax implications depending on how much pre-tax money you already have invested.

Avoiding the Pro-Rata Rule

The only way to avoid the pro-rata rule is to roll over your entire traditional IRA balance. If you make too much to contribute to a Roth IRA in the first place, you’re in a high tax bracket, resulting in a large tax bill as part of the rollover if you already have funds in your traditional IRA.

Keep in mind, the pro-rata rule looks at all of your IRAs and other pre-tax accounts, even if you keep them at different brokerages. You can’t open accounts in different places to dodge the rule.

3. Pay the Taxes Owed

When you roll money from a traditional IRA, you have to pay income tax on the money you roll over, unless the rollover is entirely composed of nondeductible contributions. If you’re rolling a large amount, you’ll want to have some money set aside to cover this cost.

To keep costs low, it might be worth timing your rollover for a year where your income is low, which means you’ll be in a lower tax bracket when you owe the tax on the amount rolled from your traditional to your Roth IRA.

Ultimately, backdoor Roth IRA contributions work best if you have little or no money in your traditional IRA. Asking a tax professional or a financial planner is a good idea if you want help with the process.


Advantages of Backdoor Roth Contributions

There are a number of reasons to consider backdoor Roth contributions.

1. Avoid Income Limits

The obvious benefit of backdoor Roth contributions is that they let you get around the income limits imposed by the IRS.

If you make too much to contribute to a Roth IRA, you probably have some extra money to save for the future. A backdoor Roth lets you get all of the advantages of a Roth IRA despite the income limits.

2. Tax-Free Growth

Money in a Roth IRA grows tax-free. You don’t pay taxes when you take money out of the account and the money you earn from your investments isn’t taxed either.

If you’re planning to invest the money anyway, by putting it in a Roth IRA, you’re getting the benefit of tax-free growth and only losing the freedom to withdraw earnings before you turn 59 ½.


Disadvantages of Backdoor Roth Contributions

Before using a backdoor Roth, consider these drawbacks.

1. Complexity

Making backdoor Roth contributions involves a few steps. You have to put money into a traditional IRA, then initiate a rollover to a Roth IRA.

If you have your traditional and Roth IRAs at the same company, your brokerage can probably help with the process, but there are a few moving parts.

You also have to make sure you submit the correct forms when you file your taxes to indicate your contributions and rollovers.

2. Combining Pre- and Post-Tax Money Is Messy

The pro-rata rule for rollovers means that backdoor Roth contributions work best if you don’t have any money in a traditional IRA.

If you do have some funds in your traditional IRA and don’t want to move the full balance of the account to your Roth IRA, you’ll be rolling a combination of pre- and post-tax funds into your Roth and leaving a combination of both in your traditional IRA.

This means you have to be diligent with your recordkeeping to make sure you don’t pay taxes on your post-tax traditional IRA funds when you withdraw money from the account in retirement.

You also have to pay taxes on any money rolled from a traditional IRA to a Roth IRA in the year you perform the rollover, which you need to plan for.


The Mega Backdoor Roth

Related to the backdoor Roth IRA is the mega backdoor Roth IRA. In rare cases, people can use a quirk of their 401(k) plan to get past the Roth IRA contribution limit, putting tens of thousands of dollars into their Roth IRAs each year.

401(k) Contribution Limits

A 401(k) is a retirement plan provided by employers as a benefit for their employees. One of the advantages of 401(k)s is their much higher contribution limits compared to IRAs.

For 2020, the individual limit for a 401(k) is $19,500 when it comes to deducting contributions from your taxes.

However, the true limit for 401(k)s is triple that number, $58,500. This limit includes all contributions made by the individual and their employer. Employees can deduct the first $19,500 they contribute and employers can contribute another $39,000 without the employee paying taxes on those employer contributions.

A small number of employers allow their employees to make post-tax, non-Roth contributions to their 401(k)s. This is like making nondeductible contributions to a traditional IRA.

You put money into the 401(k) but still pay taxes on the contributions. If your employer allows these types of contributions, you can add your own post-tax money to the account up to the $58,500 limit.

Typically, when you leave an employer, you can roll the balance of your 401(k) into your IRA. Most employers don’t let you roll your 401(k) into an IRA or make withdrawals from the account while you’re still employed. However, a small number of employers do allow these in-service distributions.

Performing a Mega Backdoor Roth Rollover

If your employer lets you make both post-tax, non-Roth contributions and allows in-service distributions, you have access to the mega backdoor Roth IRA.

To make a mega backdoor Roth contribution, contribute post-tax, non-Roth funds to your 401(k), then perform an in-service rollover of that money from your 401(k) to your Roth IRA.

Using this strategy, you can put as much as $39,000 extra into your Roth IRA each year, increasing your tax-advantaged investments by a huge amount.

Unfortunately, 401(k) plans that allow both post-tax, non-Roth contributions, and in-service distributions are incredibly uncommon, meaning that most people won’t be able to use this strategy.

However, if you run your own business or are self-employed, there’s nothing stopping you from designing your retirement plan to offer these options.


Final Word

Roth IRAs are one of the best ways to save for retirement, but if you make too much money, the IRS won’t let you contribute to the account.

For those with incomes high enough that they can’t contribute to a Roth IRA but who want to save more toward retirement, a backdoor Roth IRA contribution can help get around the limits.

If you’d rather keep the money out of retirement accounts and easy to access, you can always consider opening a taxable brokerage account. If you’re a hands-off investor, you can also think about using a robo-advisor to manage your portfolio.

Source: moneycrashers.com

You Could Get a Tax Refund for Unemployment Benefits in May

If you’re among the 40 million Americans who received unemployment compensation in 2020 and you’ve already filed your taxes, you could be getting a surprise refund.

The IRS announced that it would start issuing refunds in May to taxpayers who have submitted returns but qualify for a tax break on 2020 jobless benefits. Refunds will continue into the summer months.

Typically, unemployment benefits are taxed as ordinary income. But the $1.9 trillion American Rescue Plan that President Joe Biden signed into law on March 11 shields the first $10,200 of unemployment benefits for households with incomes under $150,000. If you’re married, each spouse can exclude the first $10,200 of unemployment benefits.

The new law, passed in the middle of tax season, left people who qualified for the tax break wondering if they’d need to file an amended return. But the IRS says that won’t be necessary. The IRS will automatically reconfigure the correct amount of unemployment compensation and taxes due, then either issue any extra money as a refund or apply it to taxes owed.

It’s not clear whether you’ll need to file an amended return if the tax break makes you eligible for certain tax credits, like the Earned Income Tax Credit.

You Still May Not Get a Break on State Taxes

Your state may not be feeling quite as generous as Uncle Sam. According to H&R Block, the following 13 states have yet to pass changes to exempt some unemployment from state taxes:

  • Colorado
  • Georgia
  • Hawaii
  • Idaho
  • Kentucky
  • Massachusetts
  • Minnesota
  • Mississippi
  • North Carolina
  • New York
  • Rhode Island
  • South Carolina
  • West Virginia

H&R block has suggested holding off on filing if you live in one of these 13 states and received unemployment benefits in 2020 in case your state changes its law.

What if I Haven’t Filed Yet?

If you haven’t filed your taxes yet, you can go ahead and use free tax filing software to submit your return. They’ll ask you a few questions to determine whether you qualify for the unemployment tax break.

The IRS has instructions on its website for those filing a paper return. But we’d strongly recommend filing online. The IRS has a huge backlog of unprocessed paper returns from 2019. Filing by paper could add months to the time it takes to process your return.

If you can’t afford your tax bill, even after the unemployment tax break, it’s still essential that you file your taxes or file for an extension by May 17. Note that filing for an extension only buys you time to file, but any money you owe is still technically due on May 17 — a month later than usual due to the tax deadline extension. You’ll minimize your penalties by filing an on-time return, even if you can’t pay anything.

Once you are able to resume payments, you can typically automatically get approved for an online payment plan within minutes. You can spread the bill out over up to 72 months in some cases if you sign up for an IRS installment plan.

One thing to keep in mind is that the tax break on unemployment is for 2020 only. If you’re still receiving benefits, consider having 10% automatically withheld by filing IRS Form W-4V if doing so wouldn’t put you behind on bills.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected]

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Source: thepennyhoarder.com

What To Do if a Tax Document Arrives After You File

In early 2019, I thought all of my tax documents had arrived in the mail, so I sat down to file my taxes in early March. Everything looked great, so I submitted my return to the IRS and went on about my merry business.

In early April, however, an unexpected document popped up in the mail. It was a 1099 form for a very small amount of freelance work I had done the previous year and forgotten about. For whatever reason, the document hadn’t been sent to me until fairly close to that year’s tax deadline.

This was an unhappy situation, to be sure. Would I be hit with any fees or interest charges? What documents do I need to file? Should I just “pretend” I didn’t see it? (Quick answer to that last one: No.) Here’s what you need to know about situations like these.

In this article

Why would this happen?

Most of the time, people receive all of their tax documents by early February and move on to file their income taxes with the IRS by the filing deadline (mid-April in most years, mid-May in 2021). However, that path isn’t always smooth. There are a few reasons why you might not receive a tax document until after you’ve already filed your taxes.

One common reason is that it may have actually been lost in the mail. If an item is not delivered properly and gets lost in the mail system, it can show up weeks or months after it was sent.

Another reason is that the person or business preparing the tax document was delayed in their preparation. Most larger businesses have accounting services that do this very efficiently on their behalf, but some businesses may try to tackle this on their own. If a business fails to get their own paperwork organized and filed, then they may fail to get your tax documents to you efficiently as well. The IRS deadline for sending most tax documents to individuals is Jan. 31, but businesses can and do fall behind that deadline, and that can result in documents arriving at your doorstep quite late.

Am I in trouble?

If this happens to you, you are not immediately in any sort of trouble. You committed no fraud and did not intentionally miss any deadlines. The IRS is actually very flexible and forgiving in these types of situations.

However, once you have the document in hand, you can’t ignore it. The IRS is likely aware of the situation, as the person or business that sent you the tax document has very likely also filed it with the IRS directly. The only reason they wouldn’t contact you is if they simply happen not to notice it. Furthermore, the longer you sit on the document, the more likely it becomes that you’ll face late fees and fines and other penalties.

What happens if you do ignore it? No matter what, you are committing tax fraud. The question is whether the IRS happens to notice the fraud. Your best approach is to handle it immediately, as that will minimize and likely eliminate any late fees and penalties.

Your best approach with the IRS is always to take action immediately on your own behalf to set the record straight. Follow the steps below as soon as possible so that a tax mistake due to someone else’s negligence doesn’t turn into your own tax fraud. If you wait, you might not be noticed by the IRS, but if they do notice you, you’ll face many difficulties and tax penalties.

How to handle a late tax document

Ideally, you’ve received the tax document before the IRS has contacted you about it. In that situation, the process is pretty straightforward. You simply file IRS 1040-X, which amends your tax return with updated information. If you used tax filing software such as TurboTax, this is done very easily within the software. If you used a tax preparer, simply contact your tax preparer immediately.

If the new tax documents indicated that you earned more income than you initially reported, this may result in you owing more taxes. Don’t worry — the amount of actual tax you owe will always be just a relatively small percentage of the new income you’re reporting. Don’t fear a higher tax bracket, as it doesn’t mean you’ll suddenly owe a ton more in taxes. If the additional amount you owe is trivial, simply pay it. If it is enough that it may cause you hardship, you will want to contact the IRS directly to discuss your options.

In some situations, particularly if you receive the tax document far past the filing deadline, you may be subject to additional fines or fees. In that situation, contact the IRS directly. You may be eligible to file Form 843, which will request a waiver of those fines and fees. Again, the IRS is flexible with those who are proactive about paying the taxes they owe and will often waive fees in situations outside of your control.

How I handled late tax documents

How did I handle my own late document? The IRS had not yet contacted me about it, so I quickly filed a 1040-X form along with a small additional tax payment (as the late form showed additional income that I hadn’t filed originally). There were no fees involved and the IRS never contacted me about it in any way. The process was simple and took less than 30 minutes. I spent more time worrying about it than it actually took to resolve the situation.

If I had waited to file the document, the IRS may have contacted me about it. In that situation, I would have owed the taxes, as well as potential interest on the unpaid taxes and other penalties as well. Simply taking care of it immediately and paying the taxes I actually owed made it into a minor issue.

See a tax professional about your specific situation; this article is for informational purposes and not intended as expert advice. We welcome your feedback on this article. Contact us at inquiries@thesimpledollar.com with comments or questions.

Source: thesimpledollar.com