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Tax Preparation - US, Canada and International - A Division of  Joseph C Smith  Tax Consultants

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                                        CLICK ON EACH BLUE TAB TO OPEN FOR FURTHER INFORMATION.
It is important to note that most of these FAQs assume that the traveler has a tax home and is working as an employee (not self employed/1099). We have tried to put in as many variables as possible, but still not make things too confusing. They stem from years of research on Joe's part. Most recommendations and tax law interpretations are based on personal audit experience and actual court cases, which are available at request. The non-traveling issues we have kept under "FAQ Basic Taxes." Read and learn, but we are also available to chat on the phone, or the "Ask Us a Question" link on the left allows you to email us without opening an email browser.

50 MILE RULE      - The truth!

Sorry, there is none. Nope! Nada! It is the equivalent of an urban myth.

According to IRS pub 463 a job is far enough away if "you need to sleep or rest to meet the demands of your work while away from home." If that rest takes place on your own pillow, in your own bed, while it remains in your tax home, you are not away from home.

The origin of this “ 50 mile rule” is based on a threefold series of misunderstandings. #1- There is a fifty mile marker used for state legislators to determine if they are “away from home.” #2- The IRS has a requirement of a new job commute needing to be 50 miles further than the old job commute before moving deductions are allowed. #3- Many companies and agencies have utilized this arbitrary number as an internal policy rule for so long that everyone assumes that it is an IRS regulation.

 
AGENCY SHIFTS (aka per diem/prn work) - Are they travel assignments or permanent jobs?

Believe it or not, your individual agency shifts worked are considered "indefinite employment," because it is employment without a contracted end date. No end date means it cannot be considered temporary. All indefinite employment is treated as a permanent job in regards to travel, meal and commuting regulations. Think about it, most “average” employee jobs are indefinite, a two week notice is all that is ever expected.

This affects the healthcare industry in relation to day to day employment positions. Even though the work agreement extends only for a shift, the employer-employee relationship continues just like any other permanent position. It is important to note here that there is still an opportunity to take advantage of mileage deductions, meals, or overnight costs with these jobs if certain variables are met. It may be best to put a short term agency/prn commitment in writing. Feel free to call us to go over these details.

AUDITS      - What are the chances the I will get audited because I am a traveler?

Understandably, this is a big fear of travelers. As a traveler there is a greater chance of an audit, but that is no reason to not travel. Audits come about for various reasons:

  • pure random 'bad luck'
  • a state is getting more aggressive by comparing licenses and residences, etc.
  • the ratio of employee expense deductions is higher than average (mileage, travel, per diems), causing a system flag
  • a lifestyle audit is initiated due incongruities like high mortgage interest deductions when there is insufficient income to support it
  • a travel company is under investigation and the IRS is making its case by collecting audit information from its employees

If you have a solid tax home, kept good paperwork, and used TravelTax to do your return (we don't charge for audits of returns we prepared) you should not wind up with any financial damage. Just hassle. See FAQ Basic Taxes for more information on audits.

AUTOMOBILE EXPENSES      - All about the mileage log!

Mileage claimed as used for work must be substantiated with a log of: DATE, WHERE, WHY, MILES DRIVEN.

You must also keep track of annual miles on the vehicle. (Either by writing down you odometer readings on Jan 1st and Dec. 31st, or estimating as best as you can with copies of service receipts close to these dates.)

We cannot stress how important this is. Transportation reimbursements ARE NOT per diems. They must be substantiated with a log. Without a log, you can claim nothing! Excessive reimbursements must be added back as income on your tax return.

Trivia: A basic mileage log weighs 0.85 oz. At current gold prices, the average full-time traveler saves more than its weight in gold on their tax return. Makes it worth the trouble, huh?

AUTOMOBILE EXPENSES      - Standard deduction vs. Actual expenses

The standard mileage deduction is a good deal. It is calculated to take into account gas, insurance, wear and tear. If you have a good car, you can make out like a bandit on the deal. However, if you car is a Hummer, well...

In the event that you decide to utilize actual expenses, you must also realize that more rigorous record keeping is required. All receipts need to be saved, including gas. The mileage log is still required to determine what percentage is personal vs. business. And the auto needs to be depreciated, those records need to be kept, along with capital gains added back to income when you finally sell or trade in your car.

AUTOMOBILE EXPENSES      - What records do I keep when renting a car?

Utilizing the standard mileage deduction is not an option when renting a car, since it has built in costs of owning. On a rental, you must still keep a log of personal vs. work miles, but also save all gas receipts. (They will have to be apportioned.) Save the receipts for the cost of the rental also, because this is fully deductible.

When your return is filed, any reimbursements you received will offset your deductions.

AUTOMOBILE EXPENSES      - How does a leased car change deductions/record keeping?

Leased cars a a type of hybrid record keeping. You must use actual costs for any deductions, and cannot use the standard deduction. Keep all receipts, including gas and a mileage log to determine personal vs. work miles.

In general the rule of thumb is that if you drive over 12,000 miles per year, the lease penalties out weigh the benefits. Most travelers fall into this category.

DEDUCTIONS      - What can I deduct as an employee?
Long list that would take up multiple pages. The best advice here is to print out one of our organizers and keep records for anything that is listed on those pages. For that matter, our annual workbook requires just about everything that you would need to file your complete return. The organizers get reviewed and refined annually. If it can save you money, it is listed. If we don't' ask for it, you don't need to keep it.
DEDUCTIONS      - Computer, internet, and phone deductions

This one causes some confusion so we will cover it here. Business deductions in the travel industry include phone calls and internet searches related to your next contract, seeking temporary housing, researching new employers, talking with recruiters, and time spent on work related internet forums.

Phones: The cost of the main land line is not deductible. In the event that you do not have a land line and only have one cell phone, there are portions that can be deducted, so keep track of your itemized bills or contact agreement. If you are claiming a portion of your cell phone bills, you need to calculate percent usage by printing out about 3 months of calls that are representative of your normal cell phone use and total the minutes of your business calls. Divide this number by the total minutes used that month and you get a business use percentage. Average the 3 monthly percentages to get an applicable percent business usage of you phone.

A portion of your computer can be depreciated and a percent of internet usage is also deductible. This is more of a good faith percentage.

HUSBAND AND WIFE CO-TRAVELERS

There is one touchy situation when both partners are travelers in regards to housing, and we are posting this table here to give you a heads up. The whys would take too long to explain here. If you are burning with the need to know why, you can give us a call.

 

SPOUSE A

SPOUSE B

WHAT HAPPENS

Both contracts with same company

Takes provided apartment

Takes subsidy

Subsidy is taxable

Both contracts with same company

Takes subsidy

Takes subsidy

Neither one taxable

Contract with different companies
Takes subsidy
Takes subsidy
Neither one taxable

Contract with different companies

Takes apartment

Takes subsidy

Not taxable

 

ITINERANT EMPLOYEE      - Definition

Someone who does not have a main place of business or post of duty, AND does not maintain a primary residence.

This person’s tax home is wherever they work. As an itinerant (aka transient), they cannot claim a travel expense deduction or receive tax free reimbursements because they are not considered to be traveling away from home. It does not matter if the job is permanent or temporary. They can occasionally claim moving expenses when they meet the requirements.

See TAX HOME - Three requirements to determine if you have a tax home.

ITINERANT EMPLOYEE    - What does it 'cost' me?

When most travelers decide to ditch the tax home (and go itinerant), they usually do not realize what it entails. Not only do all monetary reimbursements get taxed (meals, stipends, travel) but most of the travel deductions are lost also. BUT THE BIGGEST SHOCKER is that the value of the non-cash benefits also gets taxed. i.e. whatever the company pays for your housing, gets passed on to you as income. On an annual basis, that could mean up to $24,000 in income that you never see and as much as $6,000 in taxes to be paid. 

Travelling with no tax home can be liberating in regards to the freedom to go anywhere you want, and stay as long as you like. Recordkeeping becomes minimal, and you no longer have to worry about returning home for 30 days a year (and losing paychecks for that time period). Also, there are many situations that it can cost you more to maintain a tax home than paying the taxes. This is why we as a company try to make sure that becoming an itinerant worker is an informed decision. Feel free to call us to talk this through.

MEAL DEDUCTIONS      - Do I need to save grocery store receipts?

Meal receipts are not necessary, the per diem for meals is very generous and anything greater than that amount on a consistent basis would be considered excessive. So throw all those little pieces of paper away.

The only thing you need to document is that you were away from home by keeping either your contracts, or a log of dates away from home (in the event that you travel back and forth often).

MOVING EXPENSES      - Am I moving? What can I deduct? What records do I keep?

First item: If you are a traveler with a tax home you are not moving, you are technically "away from home!" And you have costs of maintaining a second residence and other expenses related to it. If you were moving, you tax home would also going with you. You don't want that! For those of you that fall into this category: You will utilize a per diem for travel days and mileage log for miles driven to the temporary location. Everything else must have receipts i.e. hotel rooms, airfare, trailer rental, etc.

Second: If you do not have a tax home, you can take advantage of actual moving expenses once a year if you stay in the same place at least 9 months and meet the distance requirements. This type individual needs to save their receipts also, but they get to also deduct utility hookups and 30 days of storage facilities.

Trivia: temporary relocation expenses and household moving deductions belong on 2 different areas of the tax return.

PER DIEM      - What are the current GSA Per Diem rates?

The website for the GSA rates is: http://www.gsa.gov/portal/category/21287

It is a fairly self explanatory site that allows you to look up all current rates in every city.

There is also an app you can download: http://www.gsa.gov/portal/content/302273

PER DIEM      - What is it?

These are maximum rates that can be given to an employee without an exchange of receipts for lodging and meals during days that an employee is away from home on the business of the employer (also called CONUS and OCONUS rates). If the company gives less than the maximum meal rate, the additional amount can then be deducted on the employee's tax return. This is not the case with the housing per diem, which would need to be substantiated with receipts to prove the additional deduction.

The rates are set by the government for every area of the world and are broken down by counties in the US. The rates can be found in IRS Publication 1542 or various online sites and are set annually. As long as the allowance does not exceed the per diem rate maximum and the company has a reasonable belief that the employee would deduct these expenses without reimbursements, no receipts are required to be exchanged.

 

PER DIEM      - How do I qualify to receive them as tax free income?
Per diems are only tax free if you have a tax home.

We all have to live somewhere, and we all have to buy our food. These things are not tax deductions (it is the mortgage interest that is deductible, not the principal). Most people have a residence in one location and pay for that residence 365 days out of the year. When their job requires them to be temporarily out of town they are also stuck paying for a second temporary residence. Be it a short term apartment or one night in a hotel, this second home is essentially a duplicated home expense incurred to earn income. To relieve this burden, the IRS allows you to deduct these expenses, or the employer can reimburse for these expenses on a tax free basis. (And so you see the beginning of large-amount-of-income-in-reimbursements cycle beginning.)

BEWARE: The IRS requires the expenses for this home to be substantial (in the case of rent = fair market value) and it must be real. Also, renting out your residence to someone else may potentially disqualify it from being a tax home. Feel free to call and tell us about your situation.

PER DIEM      - What are the "incidental" portion of the per diem for?
Every now and then we get calls with people having angst about the incidental portion of “meals and incidentals” in the per diem regulations. Incidentals are tips, fees, transportation (taxi/bus), mailing/fax costs related to the trip, etc. It is a tiny number and seems inconsequential, but a few bucks are a few bucks!
PER DIEM      - What is the difference between a Stipend and a Per Diem?

Technically a stipend is any lump sum of money given for a specific purpose (an allowance).

In the temporary staffing industry the term is often used as an amount of money given for housing expenses and its use is usually interchanged with the term per diem. The main thing to realize is that you need to clarify what the stipend is for.

The determination of whether or not it is taxable is based on the How and Whys involved. If given as a housing reimbursement, it is only tax free if the person qualifies by and having a tax home.

PER DIEM      - Why are they called reimbursements?

Because technically that is what they are; confusion arises in that they are given in advance of expenses instead of afterward. A normal reimbursement process would be:
Step 1 - Employee spends an amount of money in the process of completing work for employer
Step 2 - Turns in a receipt
Step 3 - Receives a reimbursement check separate from their paycheck.

In the case of a per diem, the reimbursement amount is pre-set, so there is no need to see a receipt and it can be given ahead of time, but it is still considered a reimbursement.

BEWARE: Whether or not it can be accepted as tax free depends on your tax home status!

PER DIEM      - Why does my reimbursement have to be apportioned in a 60/40 split?

Per diems are a “both or nothing” kind of thing. When a company pays a per diem for housing and even states that it is for housing and not meals, as far as the IRS is concerned, that payment is 60% for housing and 40% for meals. Also when a company pays less than the total amount of the combined per diem (housing & meals), the same occurs. Why? It is long and convoluted involving the 50% meal reductions and the accounting world. You will just have to trust us or read it yourself at: IRS Rev. Proc. 2011-47, under 6.05.

As always, there are exceptions: When a company directly pays for housing or reimburses an employee for exact cost of housing (per physical receipts), then a meal only allowance is optional, up to the prevailing rate. The 60-40 split only causes trouble for a company who regularly does not pay the meal per diem, but then offers to pay a housing stipend for a traveler. Come tax time that housing stipend must be split and 40% of it gets credited against the total cost of meals the traveler claims. The flip side is also true, if only 60% of the stipend applies to housing, any additional expenses over that amount are now deductible, but accurate receipts and records need to be kept.

What do you need to do about all this? Nothing, if you have us do your tax return. "That's our job," we say with a grin on our faces, "We have the 'spreadsheet from hell' for that."

RECORD KEEPING      - What to keep and how long?

Because the IRS has up to 3 years to audit a return, usually they notify taxpayers about 2 years into that time period. Therefore, anything used to obtain the numbers put on the tax return needs to be kept 6 years. (If the IRS suspects major issues with unreported income, - and travelers do have a lot of income tied up in unreported reimbursements, - they can then open the audit up to 6 years.)


One item many travelers fail to keep is contracts. Every traveler needs to keep copies of their contracts! In case of an audit, it is their only proof that they really had a temporary assignment, qualify for all of those lovely deductions, and get to keep all of those per diems as tax free.

 

RETURNING TO THE SAME AREA     - How soon can I go back?

This is probably the most frequent question we get from travelers, their recruiters, and even company owners. While everyone wishes there was a concrete rule, unfortunately there are no regulations in the tax code, so we are left looking at various tax court cases that parallel temporary workers and make judgments based on those precedents.

The IRS term involved here is "break in service," referring to the 12 month limit on temporary jobs and time spent away from one metropolitan area before returning. Using multiple cases, we have found the following IRS Chief Counsel Advice: a 3 week break is "not significant," a 7 month is "significant," and 12 months is "definitely significant."

Remember the IRS does not look at a calendar year to determine this, but what has been done over a 24 month period. If a traveler worked in San Francisco for 11 months, returned home for 4 weeks, and then worked another 11 months back in San Fran, what justification do they have for it not being their tax home? Especially if they did not have any earned income at their claimed tax home for the last 2 years? You have to go back to the definition of a tax home.

The safest rule of thumb to never work in one metropolitan area more than a total of 12 months in a 24 month time period. This does not apply to a calendar year, so you have constantly look back at where you have been, and where you think you will be going.

SECOND JOB      - How it gets treated similar to a travel assignment?

There is some good news here. With a second (minor) job, there is potentially an allowance for mileage deductions. Also, if the distance is far enough away that you must sleep before you can safely return home, the actual costs of the hotel, etc., are deductible. However, you must keep the recipes and claim actual expenses, you cannot claim per diems for housing. In addition, if you are claiming a "overnight stay," you can also then utilize the meal per diem tables for each day. For meal deductions, you do not have to keep receipts. Of course all of this assumes that you are keeping an accurate log of dates and purpose for trips.

We know it sounds convoluted, but after all, it is the IRS.

SEASONAL EMPLOYMENT      - How to treat it as a temporary assignment?

As much as we warn travelers not to go to the same assignment over and over, because of their tax home shifting to this repeating location, there is an rare instance that allows for this and it is called a minor post of duty.

The minor post of duty will often qualify for all the same deductions that a travel job does. The catch here is that there needs to be a major post of duty to coincide with the minor one. What decides the major post of duty is a test of: time, intensity of work, and dollars earned (significance of income).

The typical example would be the traveler who goes to the same location every tourist season. As long as they have a job at home that can qualify as a major post of duty, their annual assignment in Aspen is deductible. The oddity here is we have occasionally flip flopped the client to where their tax home is the seasonal job, and the job at their permanent residence becomes the travel assignment.

STATE INCOME TAX      - Which ones' are tax free? Which ones have higher rates?

States with no income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming. (Also St. Thomas and Wash. D.C. are tax free for non-residents.)

Highest Income tax states: These are harder to evaluate, as what is taxed can flip-flop based on the different brackets and rates. But according to our own experience with travelers the top ten usually are: Montana, Maryland, Maine, Minnesota, Utah, Oregon, Wisconsin, New York, New Jersey, and Hawaii. (no particular order)

STATE INCOME TAX      - In which state do I pay my income taxes?

You as the taxpayer are responsible to pay taxes in the state you work in, regardless of where your tax home resides (absent any reciprocity agreements).

Every state wants the money it feels it deserves. It has a budget and obligations to fulfill to its residents. Most states obtain this money by way of income taxes. The state where you earned your income decides how much you pay. When a traveler works in multiple states throughout the year, income has to be apportioned based on: 1) how long they were there and how much they made; 2) if and where the tax home exists; 3) and what kind of agreement that the particular states involved have established. This can get rather dicey at times. Some states have reciprocal agreements where they don’t tax each other’s residents, others do not. Usually it is because they share a border, but sometimes there is an unusual historical event that caused this regulatory tie. Then there are some states which utilize reverse credits.

This is why we exist as a company. The federal return is one thing, but the states? Our job is to sort though it all.

STATE ISSUES    - Odds and Ends

Pennsylvania – The keystone state no longer accepts Federal Per Diem Rates as an employee expense/deduction. This DOES NOT mean that the reimbursements you ALREADY received are taxable, but it does mean that any additional expenses cannot be deducted unless receipts are kept. This is a distinct contrast as the normal practice is to deduct the balance of any underpaid per diems as an employee expense on federal and other state returns.  ---   For travelers with their tax homes in PA, this deduction loss means that you will pay about $100-300 more a year in taxes to PA. (Pennsylvania has a rather low flat tax rate of 3.07 %.) If you really, really want to fight this, you can begin keeping all food and housing receipts all year round, and maybe you will gain some of that back. ---For the traveler that is just doing an assignment in PA, just sigh, and give in.


New York – New York requires all income earned all year with the same employer to be reported as NY source income on the W2 issued by that employer. Within the tax return, an apportionment form gets to the correct income earned with NY. What do you have to do about this? Nothing, that’s our job, but we do get some questions from travelers asking why their W2 lists all of their income for the year with the same agency as belonging to NY. No, payroll did not make a mistake. --- Also beware that New York has very strict tax residency laws. Travelers there even as little as 6 months have gotten letters from NY, asserting tax residency and they want their taxes! While in NY on assignment DO NOT get a NY driver’s license, register your car in NY, or open a local bank account.


Washington, DC. – Good news here, DC can only tax its residents, but not all payroll departments are made equal. Some will withhold to DC, and you will wind up having to file in the District to get it all back. The worst case is if the payroll company withholds where you are housed (MD or VA). These 2 states are a bit greedy, and will not refund your money. Ideally, your company will withhold to your home state, (just like they would if you were working in any other no income tax state). Always check your first paystub and make sure you are having the correct state withholding.

TAX ADVANTAGE      - What is it?

Tax Advantage is an industry marketing slogan for a travel reimbursement policy used by some companies. Any employer having employees that travel in the course of their work, can reimburse for expenses incurred while the employee is away from home. The reimbursements given to the employee are tax free provided there is a tax home and duplication of expenses. It is all perfectly legal.

The "advantage" in the practice is that since this sum of money is a reimbursement rather than earned wages, it does not get assessed social security and medicare taxes, saving both the employee and employer 7.5% of that sum.

TAX HOME       - What is it?

The IRS actually has a very good definition of a tax home: ( http://www.irs.gov/taxtopics/tc511.html) "Generally, your tax home is the entire city or general area where your main place of business or work is located, regardless of where you maintain your family home." Remember two things: main place of business, regardless of where you may have your permanent residence.

Why does a traveler then have their tax home in a place where they may not work? Because they constantly keep changing the location where they work, which then allows their tax home to default to where is was before they started circulating, provided they do not abandon it. As soon as they remain in one place for 12 months, or the greater part of 2 years, their tax home then shifts to that income producing area.

A traveler can also reach a point that they are considered to have abandoned their tax home. If they go long periods without returning, stay for only a few days at a time, and no longer work there (we suggest keeping PRN or per diem employment if possible), these things lead that area to be no longer considered home and are now itinerant workers (no tax home).

TAX HOME      - Three requirements to determine if you have a tax home.

"If you do not have a regular or main place of business or work, use the following three factors to determine where your tax home is. (1) You perform part of your business in the area of your main home and use that home for lodging while doing business in the area. (2) You have living expenses at your main home that you duplicate because your business requires you to be away from that home. (3) You have not abandoned the area in which both your historical place of lodging and your claimed main home are located; you have a member or members of your family living at your main home; or you often use that home for lodging.

If you satisfy all three factors, your tax home is the home where you regularly live. If you satisfy only two factors, you may have a tax home depending on all the facts and circumstances. If you satisfy only one factor, you are an itinerant; your tax home is wherever you work and you cannot deduct travel expenses." -IRS Pub 463

It is important to note that the only unquestionable tax home maintains ALL THREE requirements, not just two. If you satisfy only two of these requirements, please give us a call and we can chat. After this section on tax homes, we have attempted to put together a series of traveler profiles, where the traveler manages to maintain a tax home while only maintaining 2 out of 3. It may help you understand what maintaining the path of 2 out of 3 requires.

TAX HOME      - What is considered substantial in relation to 'duplication of expenses?'

In our experience, most travelers have a hard time maintaining a tax home by following requirement #1 (utilizing the home while performing part of their business there). This would mean that they work an agency/prn/part time job of some sort whenever they return home. Not an easy thing to do. To add to this, the more they travel, the returns become more infrequent, it giving off the appearance to having abandoned the tax home. To counter this, there needs to be a concentration of following #2 requirement of having expenses of maintaining that home so that now there is a duplication of expenditures.

In every court case involving support of point #2, the IRS looks at the expenses needing to be fair market value and that the payments be on a regular basis, showing continual burden, even while you are away from home. If you own a home, or your name is on a apartment lease, this is sufficient proof of financial burden. For others that share expenses, this gets a little more complicated. These individuals should keep some sort of record with their tax information in case of an audit. Fair market value can be established by going to local classifieds, or internet sites like craigslist or roomates.com You should have 2 or 3 of these ads saved as proof of what the market is for you area. Your payments need to also be documented somehow, be it a written receipt, copies of your checks, or trackable bank payments.

While this may seem like a hassle, it is essential information in an audit. Not keeping track of this could cost you $20,000 or more in allowable deductions.

TAX HOME      - I work repeating contracts, could one be considered my main place of business?

There are many individuals that work between 2 or 3 places in regular cycles. Depending on their circumstances it can be to their advantage to have one location be considered their tax home. The IRS would call this a "main place of business or post of duty." It is determined by:
     - The total time you ordinarily spend in each place
     - The level of your business activity in each place
     - Whether your income from each place is significant or insignificant

We explain this here so you know that there are situations that can create or flip-flop tax homes. The "tax home determination" and "main place of business" requirements are what we specialize in understanding. Please call us to discuss your particular situation.

TAX HOME       - How is it different from a permanent address?

Try to think of your permanent address is what you use as a legal address. It is the address you use to register your drivers license, or to vote. (It is also where you jury duty letter gets sent. -awk!) It is the place that you have used historically as your home and the place you plan to use in the future. Each state defines permanent addresses slightly different. Usually, your permanent address remains until you take steps to change it to another location.

Your tax home is your money base for taxation purposes only. No legal ties required.

The confusion is in that for 99% of the people in the US they are both at the same address, but for travelers, we must use them accordingly.

TAX HOME       - How do I get a tax home if I don't have one already?

Many travelers get the idea of moving their tax home to a no income tax state, or a place where they can rent a cheaper apartment, so their expenses go down. It is a great idea, but they forget that they really need some income within that metropolitan area before it can be claimed as a tax home. Without working, the area may become a permanent residence, but not a tax home.

If you really do not want to take a permanent job in that new area (only to quit after the first staff meeting), there is the option of per diem work, or even taking a travel assignment, but paying taxes on all stipends. It is the equivalent of waving a flag in the air, saying look: I live here now, I work here, I pay all of my taxes, claiming no travel deductions. Remember, now it means that you must maintain this location as your tax home, returning frequently or for a substantial amount of the year.

TAX HOME       - How to keep it? Do's and Don'ts

DO

  • File as a non-resident in assignment states
  • Keep good records. We have an organizer on our home page that can help.
  • Use one main bank account at your permanent residence. Pick one with national ATM access and on-line banking.
  • Have one permanent mailing addresses and forward mail to the assignment address. Businesses similar to the UPS Store have mail forwarding services.
  • Return home on a regular basis
  • If possible, maintain a PRN or agency job at your permanent residence and work there between assignments
  • Keep two logs - A mileage log that stays in your vehicle, and a travel expense log.
DON'T
  • File as a part year resident in assignment states (you are a non-resident).
  • Have multiple bank accounts in different states. You can have a second one for convenience if necessary, but it should be opened under your home address, not the assignment address.
  • Have multiple mailing addresses
  • Put assignment addresses on any tax form or legal document.
  • Use your assignment address to receive mail from financial or legal institutions
  • Give in to the temptation to "brag" about your location by putting assignment address on checks etc.
  • Say that you are moving or relocating - you are temporarily away from home

Practical Things You Should Do

  • Get familiar with paying bills on-line, on-line banking, and have account statements e-mailed to you. This is the 21st century.
  • Keep copies of your current contract in your car. (To explain to the nice policeman why you are not required to change your driver's licence due to the temporary nature of your assignment.)
TAX HOME       - Advantages vs Disadvantages

Pros:

  • The average tax savings from housing, meals and travel is $3K-7K a year
  • Place to return home to between assignments
  • If you keep a PRN or agency job, ability to return home while looking for the next assignment

Cons:

  • Costs you money to maintain a residence they may exceed the tax savings
  • Requires you to return home on a regular basis
  • Requires long distance maintenance of dwelling
  • Requires long distance dealing with local DMV's
  • Requires detailed record keeping
  • Less spontaneity - the next assignment or vacation has to coordinate with a trip home
  • Freedom to take an assignment without the hassles of moving a residence
  • If you own a home, you are unable to rent it out completely

Advantages to being an Itinerant Worker 

If you do not have a tax home, the IRS considers you an "itinerant worker" and your tax home is wherever you are working. In other words "wherever you go, there you are." MONEY is not everything in life and living around a tax deduction can defeat the advantages of traveling: freedom, professional experience and exploration. Freedom comes with a price and $5000 is a small price to pay the rare opportunity to travel and experience new areas.

1) No need to return home between assignments or coordinate a lengthy stay at home
2) No rents to pay, house to worry about
3) May rent your house out if you have one
4) Can freely go to new assignments without the burden of returning home
5) If you like it, you can stay as long as you want

Things to keep in mind if you choose to be an Itinerant Worker 

1) Make sure your travel company understands that you "do not have a tax home" and are an "itinerant worker." Some recruiters and companies are so determined to save on payroll taxes that they will encourage you to break the law.

2) You will hear all sorts of criticism from your fellow travelers and plenty of "schemes" that they use to fake a tax home. Many will brag about the fact that they have never been caught.

3) A tax home and a permanent residence are separate items. Continue to keep your drivers license, registration, bank accounts, insurance and mail in one place. You may be able to find a place to move all of your legal ties to take advantage of lower fees.

4) Enjoy your life.

TAX HOME       - How much rent do I pay?

In order to receive travel allowances tax free, "fair market value" is the required outlay for your permanent residence. Look in the local paper for classified ads for the neighborhood, craigslist, or another web site like roommates.com. Clip/print these ads out and put them with your annual tax information. Make sure that there is a traceable monthly amount going to whoever is the manager of the property. A rental agreement would be the best case scenario.

An alternative is sharing the total cost of the residence. Make sure you maintain documentation for the monthly household costs and a paper trail of your contributions. Putting your name on the lease, or some of the major bills (not just the water bill) in your name also helps.

 

TAX HOME       - Does the person I pay rent to have to declare it as income?

Sometimes friends or family are reluctant to take rent from travelers because they now think that they have to declare that income on their tax return, do more record keeping, file a Schedule E, etc. Not necessarily. If they are of the I-hate-paperwork persuasion, there is something called a “not for profit rental,” which could help solve this dilemma.

Your family member, or friend, has the option of declaring the received rent on the ‘additional income’ line of their 1040. Yes, about 15-30% of what they declare will wind up going to taxes, but that is less than what you would have paid in taxes on your per diems. So everyone is happy, including Uncle Sam.

TAX HOME       - Can I Rent Out My House?

No, but sometimes yes, under certain situations. Don’t you hate ambiguity?

Generally you need to have a residence available for personal use in the area of your tax home, once you have rented out your house, it is no longer your residence, but a business property. However, here are a few options if you get the urge to become a landlord.

  1. You rent it out, and lease other accommodations somewhere in the same metropolitan area for yourself. This essentially turns your ex-residence into a business venture, regardless of profit or loss.
  2. You rent it out, but retain a portion for personal use, NOT just storage. (This could be done in the case of an in-law apt, or renting to friends/family who you know well enough to stay at the house in between assignments.)
  3. You rent it out as a vacation rental. This is great for those who live in tourist areas. You are allowed to rent it out completely for part of the year while you go off on assignment. Because the lease is for less than a year, and you are occupying it the rest of the time, it qualifies, and you can still keep your reimbursements tax free.
TRAVELER EXAMPLE MEETING THE 2/3 REQUIREMENT      - Raleigh's Ralph

Do not read these profiles without also ingesting the rest of the tax home FAQ. They are essential to understanding why these individuals manage to maintain their tax homes by careful planning. We only include these examples because it is hard to understand the often abstract tax home requirements and by describing "perfect scenarios" it is sometimes easier to evaluate your own position. Please call us to talk to you about your personal situation. Just one change in the below example can change the tax home determination.

Ralph is a Nuclear Task Manager from Raleigh, NC. Due to the unique of his job, he regularly circulates over 6 different plants in the country, never more than 9 months in one place and has not worked in Raleigh since his college job ten years ago. However, he owns a home there, and his wife is a professor at Duke, his kids go to school there. Between contracts, every couple of weekends, and every holiday, he returns home.

Ralph meets criteria #2 and #3 and due to the very frequent trips home, family ties, and expenses. Even though he keeps returning to the same places, they are in different areas of the country and no one place can be assigned as more significant than any other. His tax home defaults to where it was historically and is maintained there since he has not abandoned it.

TRAVELER EXAMPLE MEETING THE 2/3 REQUIREMENT      - Aspen's Adelaide

Do not read these profiles without also ingesting the rest of the tax home FAQ. They are essential to understanding why these individuals manage to maintain their tax homes by careful planning. We only include these examples because it is hard to understand the often abstract tax home requirements and by describing "perfect scenarios" it is sometimes easier to evaluate your own position. Please call us to talk to you about your personal situation. Just one change in the below example can change the tax home determination.

Adelaide went to college in her hometown and took her first job as an orthopedic RN at the local hospital. She has lived in the same home her whole life. Mom and Dad don't take any money from her. When she got the urge to wander, she started her travel career. Fortunately for her, the hospital she works at is so short of help during ski season that she spends 3 months every winter working at her old job, while living rent free at her parents home. She also goes back there in between assignments, and keeps her primary residence there. She makes $38,000 a year with her temporary assignments and $14,000 in Aspen. (She makes about 1/4 of her annual salary there.)

Adelaide is the perfect example of meeting criteria #1 and #3 in the determination of her tax home. She may continue to claim Aspen as her tax home and receive all her reimbursements tax free provided that she keeps the locations of her other contracts changing constantly and does no repetitive assignment. Her income at home needs to always be significant in relation to her income earns in other areas. While this sounds like the ideal set up, it is very hard to maintain. You have to a have a plan, stick with it, and document meticulously.

TRAVELER EXAMPLE MEETING THE 2/3 REQUIREMENT      - Phoenix's Phil

Do not read these profiles without also ingesting the rest of the tax home FAQ. They are essential to understanding why these individuals manage to maintain their tax homes by careful planning. We only include these examples because it is hard to understand the often abstract tax home requirements and by describing "perfect scenarios" it is sometimes easier to evaluate your own position. Please call us to talk to you about your personal situation. Just one change in the below example can change the tax home determination.

Phil is another version of that perfect balance between maintaining a tax home and keeping expenses minimal. He takes one assignment after another, never in the same metropolitan area, but returns every winter to Phoenix. After several years of returning back to Phoenix, his tax home shifts there, at which point he buys an RV, and continues to travel. When in Phoenix, he pays taxes on his reimbursement money, since that is his tax home. Phil meets qualifications #1 and #3. Consistently returning for regular work in the same metropolitan area. The rest of the year, he can collect his housing tax free, and must make sure he does not return to any other area often enough that his tax home shifts there.

TRAVELER EXAMPLE MEETING THE 2/3 REQUIREMENT      - Wayne's Wilma

Do not read these profiles without also ingesting the rest of the tax home FAQ. They are essential to understanding why these individuals manage to maintain their tax homes by careful planning. We only include these examples because it is hard to understand the often abstract tax home requirements and by describing "perfect scenarios" it is sometimes easier to evaluate your own position. Please call us to talk to you about your personal situation. Just one change in the below example can change the tax home determination.

Wilma has it made with a tax home Wayne, Nebraska. She used to work in the local hospital, but she and another gal decided to go out and see the rest of the country. Wayne is a small college town with lots of old 2BR houses that sell for as low as $30,000. She and her friend split the rent on one of those tiny places for $350/month, with both of their names on the lease. Since she no longer works in the area, she makes a point of going home between assignments, hanging around several weeks each time, seeing friends, going to weddings, even renewing her CPR at the local hospital. Here bank is a national bank and all of her bills are taken care of on line, making sure that all of her finances are still centered in Wayne.

Wilma satisfies Requirements #2 and #3. She pays a fair market value for her home, spends a significant amount of time, and has all of her financial ties there, indicating that she has not abandoned that location. In her case she does well financially because her tax home is in a very low cost of living area. If she tried to do this with a tax home in Seattle, it would not be as easy due to not being able to afford to take several weeks off at a time without pay. Documentation of fair market value is essential in this equation.

TEMPORARY STATUS      - How long? When is it no longer temporary?

A temporary job requires a contracted/expected end date under 365 days. As soon as an agreement to extend beyond that date is made, the job is no longer temporary, even if the 365 days are not up yet. Ultimately is is the length of stay in one metropolitan location is taken in to account, not the job itself.

If a traveler agrees to a second job in the same area, but with a different company they have breached the temporary condition and now have essentially declared that area as their new tax home. (Ouch, sorry)

TRANSORTATION REIMBURSEMENTS      - Not the same a Per Diems! Different rules apply!

All transportation reimbursements need to be substantiated, preferably with a mileage log:
          when, where, why, and how fa
r
If used for a automobile rental: rental receipts, gas receipts and the mileage log are required.

Any money not "used up" by the log or receipts is supposed to be added into your income as excessive reimbursements! This is completely different from a housing or meal per diem. Why? We can't give you a reason. It is just the rules.

BEWARE! Some travelers get a shock when they accept a large transportation reimbursement to cover car rental, and then decide to drive their own car to the assignment and "save" the cost of the rental. While the extra miles on their car counts against the travel allowance, there is sometimes as much as $2000-$4000 left that must be added back as income. While the extra cash is nice to have, many are not ready for the additional $500-$1000 to be added to their tax bill come April 15th.

WAGE ISSUES      - Long term 'dangers' for consistently low wage rates.

While most travelers like to have a low hourly rate to avoid income taxes, they sometimes forget the risk factors:

- - Financial institutions will usually not take per diems into account as income for qualifying for loans. Per diems are considered reimbursements, not income.

- - Workers Compensation and Unemployment regulations vary from state to state, but it is usually about 2/3 of your hourly rate. With an artificially low rate, any injury while on assignment could be devastating.

- - If you were to make a career of traveling, then it would ensure that your social security payments would likewise be low. (However this is unlikely as SS is based on your 35 highest income earning years.)

WAGE ISSUES      - What is wage recharacterization?

The practice of willfully reducing wages (taxable income) and replacing it with non-taxable compensation with the intent of avoiding payroll taxes. This is an area of thin ice when companies have multiple contracts for employees performing the same job descriptions. Being accused of wage recharacterization is the fear of the agencies, not the traveler. It shows an intent to defraud, and the company can pay a fine.

Example: A company having 2 travelers working at the same location, one gets $30/hr wages plus $7/hr reimbursements and another gets $20/hr plus $17/hr in reimbursements. (Note both are getting the equivalent of $37/hr.)

Another fairly common evidence of intent with some travel companies have contracts that offer a choice of picking between a straight rate as one option and a reduced rate with a reimbursement plan as a second.

WAGE ISSUES      - Will I get in trouble for signing a contract for $10/hour?
Not really. While we always like to encourage travelers to work with companies that show better business consciences, if the contract has the right location and dates, feel free to use them with no fears of being thrown in jail. There may be a slight increase in a chance of being audited (because the IRS builds a case against an employer by auditing its employees), so long as your tax home is rock solid, you do not have much to fear in an audit.
(see wage recharacterization)