The Breakdown of Qualified Moving Expenses

What are qualified moving expenses? This type of fringe benefit can get complicated, especially after recent major changes.

In the case of some fringe benefits that are offered to or given to employees, certain benefits can be excluded from an employee’s income because the expenses would normally be deductible on an individual’s personal income tax return. A moving or relocation expense is one such employee benefit. 

Currently, only active-duty military members relocating under orders may use Form 3903 with their Form 1040 to deduct qualified moving expenses. For other employees, moving expense deductions and tax-free reimbursements are suspended through 2025 due to the Tax Cuts and Jobs Act (TCJA). For all other employees, employer reimbursements for moving expenses are generally treated as taxable income until at least 2026, unless Congress changes the law.

Understanding Qualified Moving Expenses: What Employees and Employers Need to Know

Employers who pay for the relocation expenses of an employee have the freedom to pay for whatever expenses they wish. However,  only those expenses that qualify as deductible can be excluded from the employee’s income. 

All other expenses paid or reimbursed are subject to withholding for federal income, social security, and Medicare taxes. The employer is also responsible for including such payments for Federal Unemployment Tax Act (FUTA) taxes, and in most states, the expenses are also subject to tax withholding.

As a result, employers must be able to answer the following questions to determine if relocation payments are subject to tax withholding:

• Who can deduct moving expenses?
• What moving expenses are deductible?
• How should moving expenses be reported?

The answers to the first two questions can be found in IRS Publication 521, Moving Expenses, so we will only cover the basics in this article, and we will be focusing only on employees whose expenses may be paid or reimbursed by employers. For an employee’s relocation expenses to be qualified moving expenses, the employee must meet three tests:

• The move is closely related to the start of the employee’s work.
• The location of the employee’s new home must meet the distance test.
• The individual’s employment must actually or potentially meet the time test.

Moving Expenses in 2024-2025

Under current tax law, most individuals cannot deduct moving expenses or receive tax-free reimbursement from an employer. The Tax Cuts and Jobs Act (TCJA) suspended these benefits from 2018 through 2025.

The only exception is for active-duty members of the U.S. Armed Forces who move due to a permanent change of station. These service members may still use Form 3903 to deduct qualified moving expenses, and the following tests apply:

• Closely Related to the Start of Work: Expenses must be incurred within one year of starting a new job location.
• Distance Test: The new job must be at least 50 miles farther from the old residence than the old job was.
• Time Test: The individual must work full-time at least 39 weeks during the first 12 months after the move (with some flexibility in how the weeks are counted).

For everyone else, moving expense deductions and employer reimbursements are taxable income through at least the conclusion of 2025.

Qualified Moving Expenses

The following expenses qualify as moving expenses as long as the employee meets the other tests:

• Moving the employee’s household goods and personal effects (including in-transit storage expenses), and
• Travel for the employee and his family (including lodging but not meals) from the employee’s old home to his new home. So meals are never deductible, and house-hunting trips do not qualify as deductible expenses.

Moving expenses, according to the Internal Revenue Code, must be reasonable, but the term reasonable is not defined. However, Publication 521 basically indicates that expenses are reasonable if the cost of traveling from the employee’s former home to his new one is by the shortest, most direct route available by conventional transportation. Where the regulations refer to members of an employee’s household, it refers to any individuals who were living with the employee in his old home and are relocating with the employee to his new home.

The following moving expenses are considered to be reasonable and deductible:

• The cost of packing, crating, and transporting household goods and personal effects and those of members of the household, from the former home to the new one. A professional moving company can be used, or employees may use their own vehicle for moving some items.
• The cost of storing and insuring household goods and personal effects for a period of 30 consecutive days after the employee’s belongings have been moved from their former home and before they are delivered to the employee’s new home.
• The cost of connecting or disconnecting utilities.
• The cost of shipping an employee’s car or pets to his new home.
• The cost of moving household goods and personal effects from a place other than the employee’s former home, but the deductible portion is limited to the amount it would have cost to move it from the employee’s old home.
• The cost of transportation and lodging for the employee and members of the employee’s household while traveling from the former home to the new home. Lodging expenses include the cost of lodging for one day after the employee no longer lives in his old home and expenses incurred on the day the employee arrives in the area of his new home.
• Under the Tax Cuts and Jobs Act, most employees cannot deduct unreimbursed employee travel expenses via itemized deductions from 2018 through 2025.
• Moving expense deductions (including mileage) are only still allowed for active-duty military members relocating under orders; private employees generally cannot claim these deductions. Moving mileage applies only to certain military personnel at 21¢/mile.
•  All expenses are for one trip by the employee and the employee’s household, although the employee and the members of his household do not have to travel together or at the same time.

Employers can handle an employee’s moving expenses in two different ways. Employers may pay all or some of the employee’s moving expenses directly, such as paying a moving company to move the employee’s household goods and personal effects. Or the employer may choose to reimburse the employee for all or some of his moving expenses. Payments that are made directly to a third party do not have to be reported to the IRS, but all reimbursements to the employee do.

How to Report Moving Expenses

Both qualified and non-qualified moving expenses have to be reported on Form W-2. Non-qualified moving expenses are subject to withholding at the time the reimbursements are made. Qualified moving expenses should be reported on the Form W-2 in Box 12 with Code P. Non-qualified reimbursements must be included in the employee’s wages in Boxes 1, 3 and 5. 

All qualified moving expenses, including payments made to a third party, must be included on Line 1 of Part I of Form 940 for FUTA tax reporting, but the entire amount should also be reported on Line 2 of Part I as excludable wages. So let’s take a look at a practical example. Suppose that an employer pays all of the moving and house-hunting expenses to relocate an employee to a new district office.

The distance from the active-duty military members’ old home to their new one is 850 miles, and he makes only one house-hunting trip, and the overnight lodging expense is $168. On the day the employee moves his family, his lodging expenses, including one night near his new home while he is closing on the purchase of his new home, are $187. 

The company chooses to reimburse the employee for 21 cents per mile for both trips, and his total meal expenses are $235. The company pays a moving company directly $4,200 to move the employee’s household goods.

Calculate the total costs reimbursed to the employee:

• Mileage reimbursement. (3 x 850 mi x $0.21/mi = $535.5.0)
• Lodging costs. ($168 + $187 = $355.00)
• Meal costs. ($235.00)
• Total costs reimbursed to the employee. ($535.5.00 + $355.00 + $235.00 = $1,125.5.50)

Calculate the qualified moving expenses reimbursed to the employee:

• Mileage reimbursement for one trip only at $0.21/mile. (850 mi x .21/mi = $178.50)
• Lodging for moving his family. ($187.00)
• Total qualified moving expenses reimbursed to employee. ($178.50 + $187.00 = $365.5
• Total non-qualified moving expenses reimbursed to employee. ($1,125.50 - $365.5 = $759.50)

Calculation of tax withholding:

• Federal income tax. ($759.50 x 25% = $189.75)
• Social security tax. ($743.00 x 6.2% = $47.089)
• Medicare tax. ($7759.50.00 x 1.45% = $11.01)

Reporting of fringe benefits:

• Include $11.01 in Box 6 of Form W-2.
• Include $189.750 in Box 2 of Form W-2.
• Include $11.01 in Box 6 of Form W-2.
• Include $111.01 in Box 6 of Form W-2.
• Report $365.50 in Box 12 with Code P. (Note: Qualified moving expenses paid directly to a third-party should not be reported anywhere on Form W-2.)
• Include total qualified expenses of $4,565.5 ($4,200 + $365.57) on Line 1 of Part I for Form 940.565.5557.00 on Line 2 of Part I of Form 940 as excludable wages.

Employers are no longer required to provide employees with a copy of Form 4782, Moving Expenses. However, employers should provide employees with a clear statement detailing all payments and reimbursements. Every individual who receives moving expense reimbursements must complete Form 3903 and attach it to his Form 1040. If the active-duty member of the U.S. Armed Forces has been reimbursed for all of his qualified expenses, then he must report this fact, and he will not be able to deduct the expenses on his personal income tax return. If, however, the employee later relocates and invalidates the time test, the qualified expenses reported on Form W-2 in Box 12 have to be included in income in the year the employee invalidates the time test. The employee will then have to file an amended Form 1040 for the year in which he received the original reimbursements.

Reimbursement of an employee’s moving expenses is often a valuable fringe benefit, and many companies use the promise of such reimbursements as an incentive in the hiring process. Companies that relocate employees to other company locations often provide this benefit. But employers can avoid the snares and pitfalls that often surround the taxation and reporting of this benefit if they follow the guidelines provided above and the guidelines provided in the appropriate IRS publications.

Q&A: Qualified Moving Expenses

Robert W. Ditmer, CPP, is the owner of RWD Financial Support Service, located in Raleigh, NC. Ditmer provides support and consulting services for bookkeeping, accounting, payroll and human resources. With over 25 years of experience, Ditmer has worked in many industries. He was a Controller in four different businesses, including a Philadelphia land planning/landscape architecture firm, a Wilmington private dining and catering facility, a Glastonbury, CT, IT support company and a Columbia, MD commercial construction management firm. Ditmer has also spoken at conferences and provided training on various issues. He has also written several articles about payroll and payroll taxation. He is a member of the American Institute of Professional Bookkeepers and the American Payroll Association, and qualified as a Certified Payroll Professional in 2000. He can be reached at rwdfinancial@yahoo.com.