Many folks interested in living in Costa Rica have questions regarding moving expenses to their new location.
Although every situation has its nuances, there are some general guidelines to follow. My goal is to decipher some of the information found in detail in IRS Publication 521 – Moving Expenses.
Generally, moving expenses are deductible on your federal income tax return when paid or incurred in connection with moving to a new home for employment-related reasons; in this case moving and beginning work or starting your own business in Costa Rica.
A new home is defined as your main residence, whether it is a house, apartment, condominium, houseboat, house trailer or similar dwelling, within the area of your new job location.
‘Intent’ is important when considering your circumstances. If you intend to move your household and work full-time for a period of time in Costa Rica, you will probably fulfill the objectives and be able to take the deductions.
There are some eligibility requirements for a tax-deductible move. First, as stated above, the moving expenses are for an employment-related move and they occurred within one year of beginning the new position or starting the business.
The second is a distance test. The move must be at least 50 miles farther away from your old home to your old job – easily met when coming to Costa Rica from the United States.
Finally, the third is a time test. The taxpayer must be employed at the new job at least 39 weeks during the 12 months immediately following the move (unless the taxpayer is transferred, involuntarily terminated, becomes disabled or dies), for self-employed persons or people with their own business in Costa Rica – 78 weeks during the following 24 months.
You are not considered self-employed if you are semi-retired, a part-time student or work only part-time. Again, a purpose of the move is to work. However, it is important to take into consideration the “full-time” norms for a given occupation.
For example, if working as a doctor in Costa Rica four days a week is considered full-time and you do so for the proper time period, the time test requirement is probably met.
Next is the definition of moving expenses. In general, it is limited to the reasonable cost of moving household goods and personal effects from your former home to your new home (including in-transit or foreign-move storage expense).
The cost of storing household goods and personal effects while you are at the new job location is also deductible as long as the individual resides overseas in a single location. In addition, it includes the travel and lodging costs during the move for you and members of your household.
Just as important are the following items that cannot be deducted: meal expenses, expenses relating to the purchase of or sale of your residence (including travel expenses incurred while searching for a new home after obtaining employment), home improvements to prepare the residence for sale, losses on the sale of your home, mortgage penalties, real estate taxes, temporary storage charges, temporary living expenses, losses from disposing of memberships in clubs, expenses related to settling or acquiring a lease, security deposits, car tags, or driver’s licenses.
Any reimbursement of these items is considered income without a corresponding deduction.
There are two exceptions for individuals who return to the United States from abroad. An individual who is a permanent retiree does not need a job-related reason to take moving expense deductions if they are moving to the United States even if there is no intention of working in the United States.
This is also the case for surviving spouses and their dependents. Nevertheless, the move must begin within six months after the death of the decedent where the residence was shared by the survivors and the decedent at the time of death; and the residence was outside the United States.
All other rules apply for both exempt situations, only the work requirement is waived. Consequently, retirees moving to Costa Rica cannot take the moving expense deductions without a job-related purpose along with the other stipulations listed above.
Employer reimbursed moving expenses that are excluded from income cannot be claimed as moving expense deductions. Conversely, reimbursed moving expenses included income or un-reimbursed moving expenses are considered a deduction in computing adjusted gross income rather than an itemized deduction.
Now that we have come this far, there is an additional glitch that needs to be considered. This concerns the foreign earned income exclusion. On one hand, moving expenses incurred that are not reimbursed by an employer may be taken as a deduction. On the other hand, if the taxpayer elects to take foreign earned income exclusion, all or some of the moving expense deduction will not be allowed.
Moving expenses connected with the start of work in a new job location overseas are considered directly connected with the income earned in the foreign country, and accordingly are a foreign source. Foreign source income and foreign housing compensation, generally have an exclusion from income.
A taxpayer is denied from taking a double benefit of excluding the income as well as a tax deduction for expenses allocated to that income. Therefore, if all or part of the exclusion is taken, the portion of moving expense allocable to the excluded income is not deductible.
This is relatively uncomplicated if the move relates to a single year. It becomes a greater challenge when an allocation of moving expenses must be made between two years. This is explained further in IRS Publication 54 – Tax Guide for U.S. Citizens and Resident Aliens Abroad.
Use Form 3903 to figure the moving expense deduction. It must be filed with form 1040 (you cannot file moving expenses on form 1040EZ or 1040A).
Generally, you can deduct your moving expenses in the year incurred even if they were paid in the following year. Careful consideration should be taken when a taxpayer received a reimbursement by making sure they take the deduction in the same year.
James Brohl is a CPA who lives in Costa Rica, where he has a private US tax and accounting practice. He worked for over 12 years in the private sector, including Ford Motor Company, directly before he moved to Costa Rica. His public accounting experience was with Coopers and Lybrand and James also has an MBA.
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