American Tax Return: Claiming Moving Expenses and Work Overseas

By ZM Ishmurzina

Americans who plan to work overseas can deduct moving expenses if they meet the time and distance tests. Additionally, there are special rules for American expats who are retirees, survivors and members of the Armed forces.

Claiming Overseas Moving Expenses on US Expatriate Tax Return

This is an email from one of our clients. “I plan to work overseas in Dubai and would like to find out whether I can deduct moving expenses. What should I do?”

Let’s review basic IRS rules that American expats must know.

What are the key requirements?

  1. Move must be related to work. US expats cannot claim moving expenses on American tax return if they move abroad to join the family or any other reason but a new job.
  2. Distance test. New job must be located at least 50 miles farther from the old home than the distance between the old home and the old job. Americans moving to work overseas easily meet this test to claim moving expenses.
  3. Time test. There are 2 tests: for employees and self-employed individuals. Employees must work full-time for at least 39 weeks during the first 12 months after arrival. Self-employed individuals have to work for at least 78 weeks during the 24-month period after moving to a new location.

Which moving expenses are deductible?

  1. Traveling expenses from old home to new home. Americans who plan to work overseas can deduct the cost of traveling including lodging. However, the deduction of meals is not allowed.
  2. Cost of moving household goods and personal items from old home to new home.
  3. Cost of moving household items to and from storage.
  4. Storage expenses. Reasonable expenses of storing household goods and personal items for the period of time while at a new job location.

Which moving expenses are not deductible?

  1. Expenses to buy or sell a home
  2. Losses on sale of a home
  3. Home improvement expenses
  4. Pre-move househunting expenses
  5. Real estate taxes
  6. Security deposits
  7. Return trips to old home
  8. Car tags
  9. Driver’s license
  10. Purchase price of a new home
  11. Storage expenses incurred for anything else but a foreign move and transit

Can American expats deduct the cost of international airfare if one spouse lives overseas?

Let’s review a recent court ruling about an expatriate tax return of Marilyn Noz and Gerald Majuire.

Marilyn Noz and Gerald Majuire is a married couple. They have two separate residencies: Maguire works and lives in Stockholm, Sweden and Noz lives and works in New York. They are both professors.

They did not seek expatriate tax preparation services.

Which mistake did they make? On their 2006 expat tax return they claimed travel expenses for a round-trip airfare between Stockholm and New York in addition to other unreimbursed employee expenses.

The amount was substantial. After the expat tax return review the IRS disallowed the deduction in the amount of $29,200. In addition to this, the IRS assessed an accuracy-related penalty of $1,662.

The taxpayers disagreed with the IRS decision and this expat tax issue was moved to the Tax Court. In September 2012 the Tax Court uphold the decision of Internal Revenue Service and disallowed the travel expenses. However, the Court didn’t find the taxpayers liable for an accuracy-related penalty.

Now the question is whether an American expatriate can deduct travel expenses on expatriate tax returns. There are several scenarios.

First, travel expenses can be deducted if they are moving expenses and a taxpayer meets several requirements. The airfare expense was not a moving expense on the expatriate tax return of Maguire and Noz.

Second, a taxpayer can deduct airfare expenses if these expenses are reasonable and necessary business expenses. Although, Maguire and Noz claimed that the international travel was due to personal and business reasons, they could not prove that the primary reason of their travel was business. Moreover, the fact that Maguire and Noz are husband and wife completely suggests a personal motive. In addition to that, they could not provide the details of their research collaboration.

The court stated, “It is difficult for us to conclude that the work requiring foreign travel predominated over the work that did not require foreign travel.”

On a positive note, per Code Section 6664(c)(1) the Court did not impose an accuracy-related penalty for several reasons:

  • Taxpayers acted in good faith
  • Taxpayers consulted IRS publications 17 and 529
  • Taxpayers partially completed some record keeping

American expats can also deduct living expenses while working overseas. The expats must follow guidelines when they claim moving expenses related to work overseas.

Americans must consult an expatriate tax CPA that provides international tax services if they plan to work overseas and have questions about filing American tax returns. International tax experts at Artio Partners are here to help you.