How do moving expenses affect my exclusion?

By Jason Watson (Google+)

Relocation packages, incentives, signing bonuses, reimbursements, etc. might be considered taxable earned income and therefore eligible for the foreign earned income exclusion. You must include as earned income the following-

1. Any reimbursements of or payments for non-deductible moving expenses,

2. Reimbursements that are more than your deductible expenses and that you do not return to your employer,

3. Any reimbursements made (or treated as made) under a non-accountable plan even if they are deductible expenses, and

4. Any reimbursement of moving expenses you deducted in an earlier year.

If moving expense reimbursements are considered income, the source of income changes depending on the direction of the move-

1. A move from the United States to a foreign country will generally be considered pay for future services to be performed at the new location, and will be labeled foreign source income (and therefore eligible for exclusion).

2. A move between foreign countries will be considered foreign source.

3. A move from a foreign country to the United States will typically be considered US source income, and not eligible for the foreign earned income exclusion. Bummer.

If your moving expenses are not reimbursed, you may deduct that portion which is not associated with the excluded income. For example, you earn $120,000 as foreign income and exclude $99,200 (for 2014). Your exclusion is 82.67% of your income. If you had $10,000 in moving expenses, you could deduct 17.33% or $1,733 on your tax return. Make sense? If not, we’ll take care of it.