While we can’t promise doing your taxes will feel like this, but we try to get as close as possible.
… if you are wondering, those are Joe’s feet on vacation.
WORKBOOK: Get Yours
It is all about the documentation. Sorry, you can’t escape it.
For us to do your taxes, the workbook needs to be fully filled out and submitted to us. A wise traveler will download it on their first assignment and document each assignment as you go through the year. (hint hint) Trust us, it is much easier that way. In the process of filling it out, you will learn what records need to be kept.
It is a free download, no sign up/password required. TO USE IT AS A PDF FILL, YOU MUST DOWNLOAD AND SAVE IT TO YOUR COMPUTER FIRST, THEN REOPEN THE SAVED FILE. You will then be able to type and save it as often as you need to using Adobe Reader. (download here) Or you can just print it out and hand write the answers. 😀
RECEIPT ENVELOPE: Get Yours
NOT 100% ACCURATE ANYMORE! Our Pre2018 Receipt Envelope is no longer up to date with the current tax laws. However, it will make you save more than you need, so feel free to use it for 2018. Many of the items listed are no longer deductible. We will be creating a new updated version some time this year… Along with lots of other changes… Sigh…
THOROUGH TAX LAW ARTICLE: PDF Version
Thorough article covering the new tax law as it pertains to the traveler… Yes, this is the one Joe talked about in the webinar. 😀
Think of this as your “required reading” before you sign your first tax home statement. Also, we would love it if you read this section over before calling to talk to us about your tax home situation.
Scroll down for TravelTax 401: in-depth Q&A.
There are 3 requirements and you MUST meet 2 out of 3 of these requirements, or NOTHING is tax-free and you GET NO DEDUCTIONS.
Path 1: it is your place of business= you work there. You can meet this goal by earning about ¼ of your taxable income a year at this location. If someone works registry/prn at home, that ¼-ish goal can be met fairly quickly since the local hourly rate is usually much higher than a traveler taxable rate. Eight weeks may be enough. Another method would be to work 1 contract every year at home, taking the higher taxable rate, or paying taxes on the per diems/stipends. While working, you have also met the 30-ish day spent there requirement in the process. 😀 -No monthly rent/house payments required.
Path 2: you used to work there, don’t anymore, and now maintain a residence at that location. If you are renting, it needs to be “fair market value”, so go to your local craigslist and look up “rooms and shares.” Print out a couple of these ads and keep it with your tax info. Then pay that amount monthly to your parent/friend. Don’t make it cash, but have it be something that you have a record of (canceled checks). Going forward, you need to spend approximately 30 days out of the year there. (Not a magic number, just what we have found that will usually satisfy most tax home audits.) 😀
Decisions, decisions. You will need to look at your life and see which path is best for you. Too often we see travelers wanting to do #1, so they don’t have to pay rent, but something happens…. i.e. they get stuck on the other end of the country, decide to extend….. …or the only local assignment is at the “nasty” hospital so they refuse to do that local contract and just go to CA instead…… AND THEY RETROACTIVELY RUIN THEIR TAXES FOR THE WHOLE YEAR!
IMPORTANT! – – PLEASE REMEMBER THAT THESE PATHS ARE BASED ON YOU MAINTAINING YOUR TAX HOME WHERE IT IS NOW, IF YOU WANT TO CREATE A TAX HOME IN A NEW LOCATION, YOU NEED TO EARN SOME INCOME THERE FIRST BEFORE YOU TAKE OFF ON YOUR TRAVEL CAREER! (See FAQ below on Tax Home – How do I get a tax home if I don’t have one already.)
Sometimes I use some basic numbers to help see what is going on: The average traveler can get around 20k-60k in tax-free benefits. If they do not maintain a tax home, the additional taxes could range anywhere from 5k to 15k. In the end, a traveler needs to look and see how much it would cost them to keep that tax home. That means you could essentially ‘give away’ 400-600/month in rent and not be losing a penny, because that money would be lost either way: Uncle Sam or the landlord. So follow the plan that you KNOW you can meet. 😛
It is not distance but what you do at the end of the shift that determines if the assignment is far enough away to qualify as a travel assignment. If you work a travel contract but return home at the end of the shift, you cannot deduct miles or meals, and all tax-free per diems or stipends are taxable. Sad, but true. The 50 mile radius is an internal company benchmark for their own policies. They are not based on IRS guidelines.
Why? – – All of those deductions/tax-free income is based on: 1) the work site being too far to return home every day and 2) it is a temporary job (so you can’t be expected to move your residence there). When that happens, an employee has the double burden of maintaining two residences and everything in relation to that second residence is now deductible or can be given as a tax-free reimbursement. If you return home at the end of each shift, you are showing that it is a commutable distance and deductions are disallowed. The IRS uses the term “sleep and rest test.” = So far away that you need to stop and rest/sleep before you can safely return home.
Lastly, just because you sleep away from home, does not mean that an assignment 30 miles away qualifies you. It still has to be farther than a normal commute for a local. Maybe 90 min or more?
Record-keeping can be frustrating for travelers, and we realize that. However, if you were audited and did not have those records, you could the tax-free status of the per diems and other reimbursements. That can add up to about 15-25% of the total in taxes. (Ouch!)
1) – KEEP COPIES OF ALL CONTRACTS! Companies do not keep them for you. AND those on-line versions disappear after 1-2 years.
2) – Mileage log. – Travel Reimbursements to get to and from the assignment must be substantiated. This means you must show that you “use up” that travel cash. (FYI: this is also why we have you save other things like hotel stays while on the road.) At the minimum, you need to go to Google maps and print off the calculated distance page.
3) – Keep receipts for anything else we ask for in our workbook. While your credit card statements may accurate for preparing your tax returns, it is the actual receipt that the IRS would require from you. Saving a copy on your computer/phone is acceptable.
4) – DO NOT save any grocery or food receipts. Those are covered under the meal per diems and your contract shows that you were away from home. No, he does not need to issue you a receipt! – – Our son, LT embracing capitalism… 5) – DO NOT save gas receipts unless you are renting a vehicle. If renting, you need to save gas, and all related receipts and still keep a mileage record. A leased car (long term) gets treated as an owned car, so you just need to keep track of miles.
5) – 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 and you can stretch it to 7 for a one year overlap. (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.) YIKES!
Please note that you will not find this guide anywhere in the IRS code. They are notoriously vague with their terms. As a result, we have striven to develop a few concrete suggestions for travelers. They are based on court cases (by citing records) and audits (personal experience). If you follow the guidelines below, you will be in a more defend-able position if audited. The thing you need to look at is 3-fold.
1- Spend AROUND 30 days a year at home. – Not a magic number, it’s just a goal. The main point being: 14 days a year is NOT enough! (And do not forget, you still need to be maintaining for some sort of residence there!)
2- Do not stay in any one area for more than 12 out of 24 months. – This does not use a calendar year but a 2 year look back. Also, ‘one area’ includes all places within a regional commuting/metro area. (that means surrounding towns also). Switching facilities or companies does not reset the clock! In determining how far is far enough to restart the clock, I usually ask if it is common for people who live in Town A to commute daily to Town B and work? If the answer is ‘yes” then those two towns are too close and considered the same tax area.
3- Do not return to any one area a third year in a row. – You then create a pattern, and once you have a pattern, you have a tax home there, because it has become a primary/persistent place of income. Sometimes you can follow the simple formula = stay away as long as you were there. Breaking any of these “rules” puts your tax home at risk. It is #2 that blows all of those “theory’s” about going home for 30 days to reset the clock. I would also like to point out that it is not the state, but the metropolitan area that you need to monitor. Example: If you have been in San Francisco for 11 months, you cannot even go to Walnut Creek (too close) for 11 months. But you can go to Modesto, or LA.
HOWEVER: if you stay in one state more than 2 years (where all of your income comes from that state) that state may want to consider you a full year resident and tax you on any additional income (like interest, capital gains, etc.). Provided that you have maintained your tax home well ( adequate time and money), your stipends and other tax-free money will not be in danger of being taxed. It is important to note that on a federal level (IRS), there will be no issues, this would be a state issue and would involve different state income tax rates. Do you really want that headache? Remember that there are 50 states out there, go someplace different! Don’t just keep circling the wagons! Go somewhere else!
Practical Things You Should Do:
THE Q&A BELOW ARE IN THE PROCESS OF BEING REWRITTEN TO REFLECT THE NEW 2018 REGULATIONS. PLEASE GIVE US UNTIL THE END OF JANUARY BEFORE BEING VIEWED AS ACCURATE INFORMATION. – – YOU CAN SEND UP A FEW PRAYERS ON OUR BEHALF… IT AIN’T EASY PROCESSING ALL THIS STUFF… HAHA!
It is important to note that most of these FAQs assume that the traveler has a qualifying tax home and is working as an employee (not self-employed/1099). We have tried to put in as many variables as possible, without making it confusing. The Q&A stem from years of research on Joe’s part. Most recommendations and tax law interpretations are based on audit experience and court cases, which are available at request.
Also, these Q&As just cover travel issues. We have general tax info available on the Business and Non-Traveler page of our site. Feel free to go and educate yourself even more. 😀
Sorry, it does not exist. Nope! Nada! No basis in IRS code. It is just an internal company policy that has been used so much everyone assumes it comes from the IRS.
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 permanent home, you are not away from home. It does not matter if that job is 90 miles away. By returning home, you are proving that it is within commuting distance of your home = not a travel assignment.
TRIVIA: 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- Federal Travel Regulations use a 50 mile rule for determining a metropolitan area for MILEAGE (not for lodging and meals) WHEN a person is working at a SECOND location in addition to a main place of work.
Believe it or not, your individual agency shifts are considered “indefinite employment,” because it is an employment agreement without a contracted end date. No end date means it cannot be considered temporary. All indefinite employment is treated as a permanent job.
– – Think about it, most “normal” jobs are indefinite, a two-week notice is all that is ever expected. Even though the work agreement extends only for a shift, the employer-employee relationship continues just like any other permanent position. If you are utilizing it as a stop-gap between assignments, it may be best to put a short term agency/PRN commitment in place. i.e. You will be available to work between the dates of: ___ and ___.
Understandably, being audited is a significant fear for travelers. While it is true that a traveler has a higher chance of an audit, that is no reason to stay in a boring staff job. Audits come about for various reasons:
-pure random ‘bad luck’
-a state revenue agency is cross-referencing your professional license to a tax return, etc.
-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 and kept good paperwork, you should not wind up with any financial damage. Just hassle.
If you use TravelTax, there is no charge for audit defense for any return we prepare and file.
YOU MUST KEEP A RECORD OF YOUR MILES! We cannot stress how important this is. Transportation reimbursements ARE NOT per diems. They must be substantiated (proven) with some sort of documentation, showing: DATE, WHERE, WHY, & MILES DRIVEN. Without a log, you cannot prove that you spent the money your company gave you.
In the old days, people kept a physical log, on paper. Today, you can use things like apps that record mileage, or even going to a web-based map site (like Google maps), enter the two addresses, and print out the page. That takes care of the WHERE and MILES. The DATES and WHY can be proven with copies of your contracts.
Someone who does not ‘have a main place of work, AND/ OR does not maintain a DWELLING’. – – No cyclical/annual place of work, no significant expenses in maintaining a residence of some sort. (If renting, it needs to be fair market value.)
This person’s tax home is wherever they work. As an itinerant (a.k.a. transient), a traveler cannot receive per diems, stipends, or travel money as tax-free because they are not considered to be traveling away from home. What they receive in these categories needs to be added back as taxable income on their tax return, or the company can do it for them and include it in their W2 wages.
See TAX HOME – Three requirements to determine if you have a tax home.
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. 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+ (the rent your company pays for you) in income that you never see and as much as $9,000 in taxes to be paid.
Traveling itinerant can be liberating with the freedom to go anywhere you want and stay as long as you like. Record keeping 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 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 and call us to talk this through.
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.
Both contracts with same company
Takes provided apartment
Subsidy is taxable
Both contracts with same company
Neither one taxable
Contract with different companies
Neither one taxable
The website for the GSA rates is: CLICK HERE 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. You may need to hunt for it on their website. They call it: “Mobile app for GSA rates”
Occasionally you may run into a company that uses the High-Low Substantiation rates. These are GSA rates that are averaged into two categories. They are not published on the GSA site, but issued as a PDF annually. If you Google the term, you will be able to get the current version.
These are maximum rates that can be given to an employee without an exchange of receipts. They cover lodging and meals for days an employee is away from home on the business of the employer (also called CONUS and OCONUS rates).
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 on 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.
CONUS = CONtinental US
OCONUS = Outside CON US
Per diems are only tax-free if you are working away from your tax home. And unless you are maintaining your tax home by annual work at home, you need to be able to show you are duplicating expenses at home and at the assignment. (see tax home) We all have to live somewhere, and we all have to buy our food. These things are not tax deductions (remember: mortgage interest 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, a second temporary residence must be maintained. 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 your company to reimburse you for these expenses. These reimbursements are to cover the SECOND RESIDENCE, not the first. If a traveler does not have expenses for the FIRST residence, then that extra money coming from the company is INCOME and fully taxable.
BEWARE: The IRS requires the expenses for your primary 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 to talk about your situation.
All of these are terms for “reimbursements.”
In temporary staffing industries, the terms are often used interchangeably. “Per Diems” are often used to describe the meal portion of the payment even though Per Diems include meals and lodging. The take away is that you need to clarify what the payment is for.
The determination of whether or not it is taxable is based on the Tax Home status of the recipient.
Because technically that is what they are; confusion arises in that they are given in advance of expenses instead of afterward. And they are for your away-from-home expenses, not expenses at your tax home. 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-determined per an act of Congress, so there is no need to see a receipt. Therefore, 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!
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 and you can stretch it to 7 for a one year overlap. (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 and get to keep all of those per diems as tax-free.
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 is not a precise number of days given in the tax code, so we are left looking at various tax court cases, and IRS attorney opinions and make judgments based on that information.
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. The IRS will generally consider a 3 week break as insignificant, a 7 month is significant, and 12 months as 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 = your primary place of business/income.
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.
Why all this confusion? Frequent and repetitive work engagements in the same area create a principal place of income. The duplicated expense method is an EXCEPTION to this rule for those that DO NOT have a principal place of income. Seasonal assignments are often treated as one’s principal place of income if there is no other location where more income is earned.
Not if you take it with you. In multiple audit cases, a residence is described as having a place to sleep, a kitchen, and bathroom facilities. If you take your RV on the road and leave nothing behind but a concrete pad, then there is no residence. – – You took the residence away with you. For duplication of expenses, there needs to be two residences. The one left behind at home, and the one you are needing at the job site.
I will tell you that we have had clients with vacant land that have bought two RVs. One nice and modern, and the other, um, maybe less appealing? 😀 They leave one on the land and take the other one with them.
Here is the good news, your RV is a house. As long as it is your first or second home, you can deduct the interest on the loan as mortgage interest. (Yay!)
And because it is owned, you do get something back when you sell it. While RVs do not increase in value like real estate, as a personal property, you can keep the proceeds for the sale tax-free, instead of throwing it all down a rental hole to a landlord. And for many travelers, the RV community has become a home away from home, giving travelers a group of friends in close proximity. No to mention no longer having to pack and carry boxes up two flights of stairs. 😀 — I remember one move where Joe threw our lighter boxes up to the second-floor window, where I caught and brought them inside —
States with no income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming, and St Thomas. Also, Wash. D.C. is tax-free for a non-resident.
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, North Carolina, and Hawaii. (No particular order) The biggest surprise to many is that CA is not on the list. In California, a travel nurse’s 50K income is still taxed at only 3%. – – almost poverty level for there! Haha.
You as the taxpayer are responsible to pay taxes in the state you work, regardless of where your tax home, or permanent residence, may be (absent any reciprocity agreements). You don’t buy something at WalMart and pay the sales tax at Walgreens across the street! 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…
This is why we exist as a company. The federal return is one thing, but the states? Our job is to sort through it all.
Pennsylvania– The Keystone State does not accept 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 on the PA return 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 permanent residence in PA, this deduction loss means that you will pay slightly more in taxes to PA and its municipalities. If you really, really want to fight this, you can begin keeping all food 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 received 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. – The good news here, DC can only tax its residents, but not all payroll departments are made equal. Some will withhold for 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 if you are working in DC (just like they would if you were working in any other state without an income tax). Always check your first pay stub and make sure you are having the correct state withholding.
Tax Advantage is an old industry marketing slogan for a travel reimbursement policy that was used by many companies before the waves of audits that started in 2011. 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 otherwise would not have all these FAQs/Q&As discussing it. 😀
The “advantage” (hence “Tax Advantage”) is that this sum of money is a reimbursement rather than earned wages. Reimbursements are not assessed Social Security and Medicare taxes, saving both the employee and employer 7.5% of that sum. Additionally, it is not subject to unemployment, workers compensation and disability saving another 1-3% for the employer (and sometimes the employee). So the “advantage” is that you are bypassing those payroll taxes.
The IRS actually has a very good definition of a tax home:(http://www.irs.gov/tax topics/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: the main place of business, regardless of where you may have your permanent residence.
How can a traveler 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 it was before they started circulating, provided they do not abandon it and continue to incur significant expenses to keep their main home. As soon as they remain in one place for 12 months, or have repetitive income in one area, 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 that area is no longer considered home. This can cause the traveler to be considered “itinerant” where the tax home is wherever the traveler works. As a company, we suggest that the goal is 30 days a year at home or 60 every 2 years.
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.
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 have concerns about satisfying 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.
Part 2 to the FAQ above:
In our experience, most travelers have a hard time maintaining a tax home by following requirement #1 (a job at home). This would mean that they work an agency/prn/part-time job of some sort whenever they return home. That leaves us with part 2 and 3 that must be satisfied.
In every court case focusing on requirement #2 where the taxpayer was renting, the IRS looked for reasonable fair market rental expenses. This means that if one was renting from relatives, they should pay the same as someone who was not a relative. Fair market value for rent can be found in the classifieds, craigslist, etc. and you should keep this info in your records along with canceled checks or some other 3rd party record of your payments. You can also share expenses of a dwelling with others just like roommates in an apartment. If you share a home, be sure to “share” ALL of the costs, not just one item like utilities. If you own a home, or your name is on an apartment lease, this is sufficient proof of financial burden.
While this may seem like a hassle, it is essential information in an audit.
There are many individuals that work between 2 or 3 places in regular cycles. Depending on the circumstances, it can be to their advantage to have one location be considered the 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.
This Q&A is here to just alert you that there are situations that can create or flip-flop tax homes. Please call us to discuss your particular situation. The “tax home determination” and “main place of business” requirements are what we specialize in understanding and this webs site is already big enough!
Try to think of your permanent address is what you use as a legal address. It is the address you use to register your driver’s license or 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. Usually, your permanent address remains until you take steps to change it to another location.
Your tax home is your primary area of income. No legal ties required. Pro sports players are well known for living in one city/state (permanent residence) and playing for another city across the country (tax home).
The confusion is in that for 99% of the people in the US the permanent residence is in the same area as their tax home, but for travelers, it takes on a whole new meaning.
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, to get their expenses down. It is a great idea, but they forget that they are “abandoning” their historical home and have no financial ties with the new area. Without getting into dirty detail as to why this is so important, we suggest that those who “move, then travel” – OR – those that “travel, move, and continue to travel” (see earlier definition of “moving”) attempt to earn income in this new area before treating it as a tax home. It does not “kill” your plans, but it adds additional risk should you incur an audit in the year that you moved. The income can come from a fully taxed travel assignment, agency/prn work, or other substantial employment. It does not need to be in the same job capacity. We encourage getting around 1/4 of your annual taxable income to create a substantial enough base.
This is the equivalent of waving a flag in the air, saying look: I live here now, I work here, and I pay all of my taxes. Remember, now it means that you must maintain this location as your tax home, returning frequently or for a substantial amount of the year. Going forward income is no longer required every year… but it does help. 😀
–The average traveler gets 20-50K of tax-free benefits a year, not paying taxes on that income easily adds up to 6-10K in savings.
–You have a place to return home to between assignments.
–If you keep a PRN or agency job, you will have the option to return home while looking for the next assignment.
–Costs you money to maintain a residence, it could exceed the tax savings.
–Requires you to return home on a regular basis.
–Requires long distance maintenance of a dwelling.
–Requires long distance dealing with local DMV’s.
–Requires detailed record keeping and 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, but must keep a portion for personal use.
Advantages to being an Itinerant Worker
If you do not have a tax home, the IRS considers you an “itinerant” 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. However, freedom comes with a price and you must do the math to see if that price is worth it.
In the end, you may find that after you subtract the costs of 1) maintaining your tax home, 2) the costs of traveling home every so often, and 3) losing pay for the weeks you take off to spend at home, your tax savings may have dwindles down to $3K-5K. You may find yourself deciding that it is a small price to pay the rare opportunity to travel and experience new areas.
Things to keep in mind if you choose to be an Itinerant Worker:
Freedom! (Our son, David … odd child… but we love him anyway)
In order to receive travel allowances tax-free, if you do not own a home, you must be paying “fair market value” rent. Look in the local paper for classified ads for the neighborhood, craigslist, or another web site like roommates.com. Clip or print these ads 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 all of the monthly household costs for several months to determine your share of the costs. And then keep 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.
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, leading to more record keeping, filing a Schedule E, etc. Not necessarily. If they are of the I-hate-paperwork persuasion, there is a simpler option.
Your family member, or friend, can declare the received rent on the “additional income” line of their 1040 and calling it a “not for profit rental.” 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.
Now as to whether your parent should declare that money as rent is in a gray area. (sigh) There are families who pool their money together and share all expenses. In that family, it does not need to be declared as rent. Sometimes it can even be justified by math. Expenses ‘X’ get divided by the number of adults living there. – – On the other hand, if you are trying to justify your $300/month rent for a room in a house where the monthly upkeep is $3500, then declaring on the additional income line on your mother’s tax return, may be the better route to go. Because once that money has been declared, and the taxes have been paid, there can be no question as to the validity of it being rent. Neither route is more likely to cause an audit on either one of you. Audits are few and far between. Sometimes we tell people to do the thing that allows them to sleep at night. 😀
Remember, your requirements in an audit would be:
1- Proof that you had the monthly expense (some sort of trail to follow the money).
2- Proof that the amount is at least as much as renting a room would cost. (craigslist ads)
Generally 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.
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.
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.)
You rent it out as a vacation rental. This is great for those who live in tourist areas. You still must use the dwelling as your lodging and the period that you rent it cannot be all 12 months. Just let the snowbirds use it in winter! Hopefully, they are done with wild parties…
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. By describing “perfect scenarios” it is sometimes easier to evaluate your own position. Feel free to contact us about your personal situation. Just one change in the below example can change the results. Ralph is a Nuclear Task Manager from Raleigh, NC. Due to the uniqueness 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 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.
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. 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 results. Adele 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 legal ties there. She makes $38,000 a year with her temporary assignments that vary by location and $14,000 a year in Aspen. (She makes about 1/4 of her annual salary there.) She also does not repeat another location annually outside of Aspen.
Adele 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 not repeat assignments in another single location. Her income at home needs to always be significant in relation to her other income. While this sounds like the ideal set up, it is very hard to maintain. You have to have a plan, stick with it, and document meticulously.
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. 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 results. 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. Her bank is a national bank and all of her bills are taken care of online, 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 there, and has all of her financial ties consistently in Wayne, 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.
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. It is the length of stay in one metropolitan location that is taken in to account, not the job itself.
Also, even though you may take a break from a particular location, if you sign an extension within 91 days after leaving the assignment, the agency may consider it continuous employment. The IRS would view premeditated (with intent) commitments to the same areas as continuous engagements even if you are away working elsewhere for 3 months. Yeah, it is a technical issue where you may be hung out to dry, even though you are on the correct side of the line.
All transportation reimbursements need to be substantiated, preferably with a mileage log: When, Where, Why, and How Far.
If used for an automobile rental: rental receipts, gas receipts, and the mileage log are also required.
Any money not “used up” by the log (or receipts) is supposed to be added into your income as excess reimbursement! This is completely different from a housing or meal per diem. Why? We can’t give you a reason. It is just the rules.
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.)
“Lifestyle Audits”: If your reported income is not sufficient to support your large mortgage interest payment and/or dependents, the IRS may want to know where the money is coming from. Hmmmmm?
The practice of willfully reducing wages (taxable income) and replacing it with non-taxable compensation with the intent of avoiding payroll taxes. Being accused of wage re-characterization is the fear of the agencies, not the traveler. It shows an intent to defraud, and the company can subject to some serious penalties.
This is a very involved topic, but as of December 2017, there were about 25 healthcare staffing agencies that had been involved in audits within the last 5 years touching on this issue.
Below are links to websites that may help you learn and get connected to the traveler community.
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