Archive for the ‘military’ Tag

Back to Basics Part XVI – Form 3903 – Moving Expenses

Originally published in the Cedar Street Times

June 12, 2015

The U.S. Census Bureau estimates that average Americans will move 11.7 times in their lifetimes, with 6.4 of those moves between the ages of 18 and 45.  Most of those moves between 18 and 45 will likely be work related moves that will qualify people for tax breaks on the expenses incurred during the moves.  Today we will be talking about Form 3903 – Moving Expenses.  If you would like to catch up on our Back to Basics series on personal tax returns, prior articles are republished on my website at www.tlongcpa.com/blog .

A lot of people may not realize they can deduct expenses related to a move.  It is true, that in order to receive preferable tax treatment, a move must have a change of work location component, but it does not actually mean you have to find a job before you move, or even be the reason you move in the first place.  You could move to the Monterey Peninsula, or anywhere for that matter, simply because it is beautiful, and you could still deduct moving expenses as long as you meet two primary tests – time and distance.

The time related test says that you must have a full-time job for 39 weeks out of the first 52 weeks in your new location.  You do not have to know in advance.  The weeks do not have to be contiguous, nor do they even have to be with the same company, or even start when you arrive, but they do need to be full-time.  There are some exceptions to this 39 week requirement, such as getting laid off, getting transferred by your employer, or retiring to the U.S. from another country.  Another out for you is to keel over and die, at which point your executor can still claim the moving expenses on your final return…people rarely go for this tax planning strategy.

If you are self-employed, you have to work full-time for 78 weeks out of the first 104 weeks after moving.  You might wonder how you are supposed to take a deduction for something that takes longer than a year to really know if you qualify.  The answer is that you claim the deduction in the tax year or tax years the moving expenses are incurred if you have reason to believe you will meet the requirements.  If you are wrong, and you claimed expenses you should not have, you are supposed to either amend the prior return(s) or add it as additional income to your next tax return.  If you did not claim expenses and later realized you qualified, then you have to amend.

The other test is the minimum 50-mile distance test.  People often think the distance test is based on the distance from their old home to their new home, but it is actually based on the difference between the distance from your old work place to your old home and your old work place to your new home.  So if your old commute was 10 miles one-way to work, then the distance from your new home to your old work place needs to be at least 60 miles.  This could create some interesting situations.  Let’s assume you work a block from your house.  Then you receive a high-paying job offer in another town 51 miles away.  Your family is rooted in your existing community so you really do not want to leave the area.  With the increased pay you decide to buy the house for sale which is next door to your old house.  In this case you would meet the distance test, even though you will have only moved next door, and you can deduct any qualified expenses.

So what expenses qualify?  In a thimble, the answer would be packing costs, transit of household goods and family members, as well as lodging costs.  In other words, all the packing boxes, tape, markers, bubble wrap, movers, truck rentals and related fuel, airline costs, parking and tolls, pet transportation costs, hotel bills, etc.  If you drive your cars to transport them, or if you use them for trips back and forth to haul goods, you can deduct 23.5 cents per mile or deduct gas and oil receipts.  You can also deduct the cost of storing your goods between houses for up to 30 days.  In addition, you can deduct the cost of disconnecting or reconnecting your utilities.  If you are moving overseas, you can deduct the costs of storage of your household items in the U.S. each year until you return.  After the year of move, these expenses would not go on a 3903, but directly on your 1040 or 1040NR.

There are number of costs you are specifically NOT allowed to deduct as well.  Some of these include meals during the move, extra driving or lodging due to sightseeing during the move, pre-move house hunting expenses, fees paid for breaking leases, or security deposits given up on your old home, among others.

If you are in the military, and you receive PCS (Permanent Change of Station) orders, you are automatically qualified, and neither the time nor distance tests apply.  You can also deduct the costs of your move within one year of ending your active duty.  There are other special rules for military moves as well.

Regardless of who you are, if you get reimbursed by your employer and the reimbursements are not treated as taxable income to you (included in box 1 of your W-2 as income), then you can only deduct the expenses in excess of the reimbursement.  Normally, employers report moving expense reimbursements in box 12 with a code ‘P,’ and they are not treated as income in box 1.

Once you figure out your deductible expenses and reimbursements, the Form 3903 is a short five-line form.  It feeds into the adjustments to income section on the face of your 1040.  This is positive since it is available to all taxpayers, and not just those who itemize deductions.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Military Taxation in CA Part II – Nonresidents

Military Taxation in CA Part II – Nonresidents

Originally published in the Cedar Street Times

February 22, 2013

Two weeks ago I laid the groundwork for important definitions related to taxing military servicemembers.  I also discussed how servicemembers are taxed just like California residents if their domicile is California, and they are stationed in California.  If a member whose domicile is California has a permanent change of station (PCS) outside of California, they are considered nonresidents.  Under California law, nonresidents are not taxed on their military income or intangible income such as interest and dividends.  They would also not be subject to taxation on military income in the other state either due to the federal Servicemembers Civil Relief Act which prohibits another state from taxing a servicemember’s military income while domiciled in another state.

Due to the Military Spouses Residency Relief Act of 2009 (MSRRA), spouses that go with the military servicemembers now receive similar treatment and their earnings from personal services and intangible income such as interest and dividends are exempt from tax. In the past they had to file as residents whenever they met the requirements of wherever they were physically living.  This act applies to all military servicemembers’ spouses regardless of domicile or station as long as both spouses have the same domicile.  This is a very important distinction.  And you cannot simply adopt your military spouse’s domicile.

If the military spouse was domiciled in Texas, for instance, and then gets married in another state, the new spouse cannot claim Texas unless he or she actually lives in Texas and takes proper steps to make it his or her domicile.  They could both claim the same domicile in the state they are living at the time, but that may be undesirable if that state has unfriendly military tax laws.  Regardless, until both spouses are able to claim the same domicile, the coveted provisions of MSRRA generally do not apply.

Another interesting twist to watch out for is if a California domiciled servicemember gets PCS orders to another state and the spouse stays in California.  In this case, all of the spouse’s income is now taxable to California as well as half of the military servicemember’s military pay and interest/dividends, etc. as community property of the spouse!

All the same rules apply to servicemembers whose domicile is in another state but are stationed in California, except they would look to their own state of domicile to see how that state may tax or exempt its servicemembers for its own state tax purposes.  California, however, would not be able to tax the servicemember or the spouse (assuming they have the same domicile).  The most common places I see for military domicile are Texas and Florida: neither has a state income tax.  This way, whether they are stationed in their own state of domicile or elsewhere, they have no threat of paying state income taxes.

It is also important to know that the military servicemember’s nonmilitary income would still generally be subject to taxation wherever it is being earned,and so would items like rental property income.  Many military people own homes in multiple states.  They should be aware they may have to file a tax return in those states.  Depending on the state, some people may need to file state returns even if the property produces losses every year which create carryovers to be utilized when the property is sold.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Military Taxation in CA Part I – Domicile, Residency, and CA Residents

Originally published in the Cedar Street Times

February 8, 2013

Here in this little part of California that some call heaven, we have a number of military related institutions drawing servicemembers from around the world. The next few articles will focus on military taxation in California.

The first thing we need to do is define a few important terms.

Home of record is a term that indicates the place you were living when you entered the military, and cannot be changed.  This generally does not affect taxation, but can affect benefits.

Your residence is the place you are physically living.

State of legal residence for military purposes is typically synonymous with domicile to be discussed next.  Do not confuse this with legal residence which you see on many non-military legal forms indicating a desire to know your residence address as opposed to your mailing address!

Domicile is the place that you consider your permanent home; if you are living away from your home, it is the place you would return to after being absent for temporary or transitory purposes  (or away on military orders).  It is usually the place you are registered to vote, have your bank accounts, have your driver’s license, register your vehicles, perhaps still own a home and store personal items, etc.  You have the option of changing your domicile by making convincing changes to items such as the above, but you generally have to be present in the state at the time, show that you have abandoned your prior domicile, and notify the military of this change.

Residency more closely determines how you are to be taxed, but is affected by domicile.  For a civilian, residency is a term given if someone is in California for other than a temporary or transitory purpose (generally nine months or more), or conversely someone whose domicile is in California but out of the state for temporary or transitory purposes.

For a military servicemember, residency is even more closely tied to domicile.  A military servicemember whose domicile is California is considered a resident if stationed in California, and a non-resident if stationed elsewhere due to Permanent Change of Station (PCS) orders (not temporary orders regardless of duration).  A military servicemember whose domicile is outside of California but that is stationed in California is considered a non-resident unless he or she works to change his or her domicile to California.  Most people are trying to get out of California taxation, so I rarely see military people changing their domicile to California!

Now let’s start to talk about what this means for tax purposes, including how it affects spouses.  Based on the above definitions we will start with those that are considered California residents (again, those that are domiciled and stationed in California).  It is pretty straight-forward:  these individuals are taxed on all their income including their military income.  The spouse will generally also be considered a resident and will be taxed the same, unless the spouse is also a military servicemember, and has a different domicile.  That spouse would then be a nonresident and taxed differently.

In my next column in two weeks, we will begin talking about nonresident military personnel, which accounts for the majority of servicemembers living in this area.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.