Moving Expense Deduction for US Expats Returning from Hong Kong: Post-TCJA Rules for Job Relocation

The Tax Cuts and Jobs Act (TCJA) of 2017 suspended the moving expense deduction for most taxpayers from 2018 through 2025. For the US citizen or green card holder repatriating from Hong Kong to take up a new job in the United States, this suspension created a significant blind spot. Many returning expats, accustomed to employer-reimbursed relocation packages, discovered that unreimbursed moving costs—shipping household goods from a Mid-Levels flat, terminating a Hong Kong lease, or relocating a family—were no longer deductible under IRC § 217. However, the TCJA’s sunset provisions are scheduled for December 31, 2025. Unless Congress acts, the moving expense deduction, along with several other individual provisions, will revert to pre-2018 law for tax year 2026. This impending reversion, combined with the specific mechanics of claiming the deduction for an international move from Hong Kong, makes this a critical planning topic for any US person currently based in the SAR and contemplating a return to the US for employment.

The Current Suspension: IRC § 217 and the TCJA

The operative rule for tax years 2018 through 2025 is clear: IRC § 217(a), which previously allowed a deduction for moving expenses paid in connection with the commencement of work at a new principal place of work, is suspended. This suspension applies to all taxpayers except members of the Armed Forces on active duty who move pursuant to a military order and incident to a permanent change of station (IRC § 217(g)).

For the Hong Kong-based US expat, this means that any unreimbursed moving costs—such as packing and shipping containers via sea freight, storage in transit, travel and lodging for the taxpayer and family, or the cost of terminating a Hong Kong tenancy agreement—incurred in connection with a job relocation back to the US are not deductible for returns filed for 2024 or 2025. The employer may still reimburse these costs, but such reimbursements are now treated as taxable wages to the employee, subject to federal income tax, Social Security, and Medicare withholding. For the Hong Kong-based employee whose employer does not gross up for US payroll taxes, this creates a net tax cost that was previously avoided.

The 50-Mile and 39-Week Tests (Historical Context)

Understanding the pre-TCJA rules is essential for planning for a 2026 move. The deduction under pre-2018 law was subject to two mechanical tests. First, the distance test under IRC § 217(c)(1): the taxpayer’s new principal place of work must be at least 50 miles farther from the taxpayer’s former residence than the former residence was from the former place of work. For a taxpayer moving from Hong Kong to New York, where the former commute was effectively zero (working from a home office in Happy Valley or walking to a Central office), the new commute from the former Hong Kong residence to the new US office would easily satisfy this test. Second, the time test under IRC § 217(c)(2): the taxpayer must be employed full-time for at least 39 weeks during the 12-month period immediately following the move. For the returning expat starting a new role in the US, this 39-week requirement is the primary compliance risk. If the taxpayer resigns or is terminated before 39 weeks, the deduction is forfeited and must be included in income in the subsequent tax year, unless the failure to meet the test is due to death, disability, or involuntary separation from the employer (other than for willful misconduct).

The Sunset: What Returns to Pre-TCJA Law

The TCJA’s individual provisions, including the suspension of the moving expense deduction, are scheduled to sunset after December 31, 2025. This means that for tax year 2026—returns filed in early 2027—the deduction under IRC § 217 will be reinstated for all taxpayers. The deduction will once again be an above-the-line adjustment to gross income, meaning it is available even to taxpayers who do not itemize deductions. The standard mileage rate for moving, which was 17 cents per mile in 2017, will likely be adjusted by the IRS for 2026. For a move from Hong Kong, the mileage rate applies only to the US-leg of the journey (e.g., from the airport of arrival to the new residence), but actual expenses for the international travel and shipping can be deducted in lieu of the standard rate.

Qualifying Moving Expenses for a Hong Kong Relocation

For a 2026 return, the deduction is available for two categories of expenses: the cost of moving household goods and personal effects, and the cost of travel (including lodging) from the former residence to the new residence. The IRS regulations under IRC § 217(b)(1) define these expenses with specific rules that are particularly relevant for an international move.

Household Goods and Personal Effects

The cost of packing, crating, in-transit storage, and insuring household goods and personal effects is deductible. For a move from Hong Kong, this typically includes the cost of a shipping container via ocean freight, the cost of a moving company to pack the apartment, and any storage fees incurred while the goods are in transit. The IRS has consistently held (see Rev. Rul. 70-520) that the cost of moving a household pet is also a deductible moving expense. For the Hong Kong expat with a dog or cat, the cost of the airline’s pet cargo fee, the health certificate, and the import quarantine fees (if moving to Hawaii or another quarantine state) are deductible as part of the cost of moving personal effects. Notably, the cost of moving a car from Hong Kong to the US is deductible as a personal effect, but the cost of shipping a second car for a spouse or dependent is also deductible, provided the car is a personal effect and not inventory or business property.

Travel and Lodging

The cost of transportation and lodging for the taxpayer and members of the taxpayer’s household while traveling from the former residence to the new residence is deductible. For a Hong Kong relocation, this means the cost of airline tickets for the taxpayer, spouse, and dependents are deductible. The IRS takes the position that the cost of a meal during travel is not deductible under IRC § 217, a distinction from the business travel deduction under IRC § 162. Lodging expenses incurred en route, such as a hotel stay in Los Angeles or San Francisco while awaiting a connecting flight, are deductible. The taxpayer may elect to use the standard mileage rate for the US-leg of the trip (e.g., driving from the airport to the new home) or deduct actual vehicle expenses, but not both.

Non-Deductible Expenses

Several costs commonly associated with a Hong Kong relocation are explicitly non-deductible. The cost of selling a Hong Kong residence (e.g., agent’s commission, legal fees, stamp duty) is not deductible under IRC § 217. Similarly, the cost of purchasing a new US residence (e.g., title insurance, loan origination fees, attorney fees) is not deductible. The cost of terminating a Hong Kong tenancy is also non-deductible, as is the cost of pre-move house-hunting trips to the US. The IRS has consistently ruled that expenses incurred before the move, such as travel to the new location to find a home, are not part of the moving expense deduction (see Treas. Reg. § 1.217-2(b)(3)).

Interaction with the Foreign Earned Income Exclusion and Form 2555

For the US citizen or green card holder living in Hong Kong, the interaction between the moving expense deduction and the Foreign Earned Income Exclusion (FEIE) under IRC § 911 presents a specific compliance trap. The FEIE for 2024 is USD 126,500 per qualifying individual. The issue arises because the moving expense deduction, when reinstated, is an adjustment to gross income. However, the FEIE is applied to foreign earned income after deductions that are allocable to that foreign earned income.

The Allocation Rule Under IRC § 911(d)(6)

Under IRC § 911(d)(6), if a taxpayer claims the FEIE, any deductions that are “properly allocable to or chargeable against” the excluded foreign earned income are not allowed. The IRS has taken the position that moving expenses incurred to move from a foreign country (Hong Kong) to the United States are allocable to the foreign earned income that was earned while the taxpayer was a bona fide resident of Hong Kong. This means that for a taxpayer who claims the FEIE for the year of the move, the moving expense deduction is disallowed to the extent it is allocable to the excluded income. The allocation is generally made based on the ratio of excluded foreign earned income to total earned income for the year. If the taxpayer’s entire salary for the year is excluded under the FEIE, the entire moving expense deduction is disallowed.

Planning for the Year of the Move

The taxpayer who repatriates mid-year faces a choice. If the taxpayer claims the FEIE for the entire year’s Hong Kong salary, the moving expense deduction is effectively lost. The alternative is to elect out of the FEIE for the year of the move, paying US tax on the Hong Kong salary but claiming the foreign tax credit (FTC) under IRC § 901 for Hong Kong salaries tax paid. This allows the moving expense deduction to be claimed in full. The trade-off depends on the taxpayer’s Hong Kong salaries tax rate (the standard rate is 15% after allowances, but can be lower) versus the US marginal rate. For a taxpayer in a high US bracket, the FTC may fully offset the US tax on the Hong Kong income, making the election to forgo the FEIE a net positive because it preserves the moving expense deduction.

The Form 2555 and the Bona Fide Residence Test

To claim the FEIE, the taxpayer must file Form 2555 and satisfy either the bona fide residence test or the physical presence test. For the year of repatriation, the taxpayer’s bona fide residence in Hong Kong is typically considered to end on the date the taxpayer leaves Hong Kong with the intention of not returning. The IRS has held (see Rev. Rul. 71-462) that a taxpayer who abandons a foreign residence and moves back to the US is no longer a bona fide resident of the foreign country as of the date of departure. This means that for the portion of the year after the move, the taxpayer cannot claim the FEIE. The moving expense deduction, however, is claimed in the year the expenses are paid, regardless of the taxpayer’s residence status at the time of the move.

State Tax Considerations for the Returning Expat

The moving expense deduction is a federal deduction under IRC § 217. However, state tax treatment varies significantly. For the returning expat who establishes residence in a state with a state income tax, the state’s conformity to the TCJA is the controlling factor.

Conformity States vs. Decoupling States

Most states that impose an individual income tax conform to the Internal Revenue Code as of a specific date. Some states, such as California, New York, and New Jersey, have “decoupled” from the TCJA’s suspension of the moving expense deduction. This means that for state tax purposes, the moving expense deduction remains available even during the federal suspension period (2018–2025). For a taxpayer moving to California in 2025, the unreimbursed moving expenses are deductible on the California state return (Form 540) but not on the federal return (Form 1040). The taxpayer must compute the deduction using California’s pre-TCJA rules, which generally mirror the federal rules under IRC § 217 as in effect on January 1, 2017. For a 2026 move, when the federal deduction is reinstated, most conformity states will automatically allow the deduction, but the taxpayer should verify the state’s specific conformity date.

The Hong Kong Connection: No State Tax While Abroad

A critical point for the Hong Kong-based US person is that no US state imposes a tax on income earned while the taxpayer is a non-resident of that state. A taxpayer who maintains a US address (e.g., a family home in California) while living in Hong Kong may inadvertently retain California residency for state tax purposes. The California Franchise Tax Board applies a “nine-factor test” to determine residency, including the location of the taxpayer’s permanent home, the location of the taxpayer’s family, and the taxpayer’s intent to return. For the taxpayer who intends to return to California after a Hong Kong assignment, the state may argue that the taxpayer never abandoned California residency. In such a case, the taxpayer would owe California state income tax on worldwide income, including the Hong Kong salary, for the entire period of the assignment, subject to a credit for foreign taxes paid. The moving expense deduction, if allowed by California, would be claimed on the California return for the year of the move.

Actionable Takeaways

1. For a 2025 move, the moving expense deduction is suspended at the federal level. Employer reimbursements are taxable income; negotiate a gross-up for US payroll taxes or structure the reimbursement as a non-taxable accountable plan if the employer is a US entity.
2. For a planned 2026 move, the deduction is expected to be reinstated. The 39-week full-time employment test is the primary compliance risk; ensure the employment contract has a minimum 39-week term or structure the move to avoid a mid-year termination.
3. Do not claim the FEIE in the year of the move without modeling the interaction. The moving expense deduction is disallowed to the extent allocable to excluded foreign earned income; electing out of the FEIE and using the foreign tax credit may yield a lower overall US tax liability.
4. State tax treatment of moving expenses varies. If moving to a decoupling state like California or New York, the deduction may be available on the state return even during the federal suspension period; file separate state forms and track expenses accordingly.
5. Maintain detailed receipts for all moving costs. The IRS requires substantiation for each expense category (shipping, travel, lodging) and will disallow the deduction for any expense that is not adequately documented, even if the deduction is otherwise available.

本文不構成稅務建議。涉及個人稅務情況請諮詢持牌會計師或稅務師。 / This does not constitute tax advice. Consult a licensed CPA or tax advisor for your specific situation.