Travelers Tax Information Pre-2018

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. It is important to note that there is still an opportunity to take advantage of mileage deductions, meals, or overnight costs with these jobs if certain variables are met. 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.
• your deducted business expenses are 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 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 can claim nothing!

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. For travelers who do not have call or extra shifts, this only needs to be done twice: 1-for the trip to the assignment and then 2- one trip to the hospital. That takes care of the WHERE and MILES. The DATES and WHY can be proven with copies of your contracts.

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

The standard mileage deduction is a good deal. It is calculated to take into account gas, insurance, repairs, and wear and tear. If you have a good car, you can make out like a bandit. However, if your car is a lemon 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. Also, the auto needs to be depreciated and that data stays with the vehicle. The day you finally sell or trade in your car, you may have to pay tax on depreciation recovery or capital gains.

FYI: Leased cars can utilize the standard mileage deduction.

NOTE: This is for short term rentals, not leases!

Utilizing the standard mileage deduction is not an option when renting a car. (The Standard Mileage Deduction has built into it the costs of repairs and maintenance.) On a rental, you must still keep a log of personal vs. work miles, but also save all gas receipts. (The gas needs to be able to be separated into business and personal.) Save the receipts for the cost of the rental also, because this is fully deductible.

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

It is a 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 unless it’s some esoteric deduction that only you know about. 😀

The other thing would be to order a receipt envelope. The request button is just below the workbook link.

We admit this one causes some confusion and to be brutally honest, it is a lot of work for something that normally does not make a big difference on the tax return. It is OK to skip deductions like this, but if you want to save every penny you can…

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 landline is not deductible. Admittedly, this is an archaic rule, but it is still IRS policy. In the event that you do not have a landline and only have one cell phone, there are portions that can be deducted, so keep track of your itemized bills or contract agreement. If you are claiming a portion of your cell phone bills, you need to calculate percent usage by printing out about 2-3 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 your 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 number. The attitude being that since you were conscientious enough to keep all other records, this number is probably accurate.     😀

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), 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.

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 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 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.

	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

Meal receipts are not necessary as the meal per diem 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).

Answer #1: If you are a traveler with a tax home you are not moving, you are technically “away from home on a business trip!” And since you have a residence at home, you are now dealing with the costs of maintaining a second residence. Using the word ‘moving’ would get you into dangerous territory with an auditor. If you were moving, your driver’s license, car registration, and tax home would be also going with you. You don’t want that! Never use the word “move” in regard to your assignments and never post on Facebook that you “moved” to your new gig. Now, since you are being mobilized to a temporary assignment…   😀    …you will utilize a meal 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.

Answer #2: 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 of 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.

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). 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 was necessary. If the agency does not specify a meal rate and you are using the allowance for housing, 40% of the allowance is deemed to be the meal reimbursement by the IRS.

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 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.

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, 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 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.

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 is a few bucks!

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 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!

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 by searching for it: IRS Rev Proc 2011-47 Sept 30, 2011.

As always, there are exceptions: When a company directly pays for housing or reimburses an employee for exact housing expense, then a meal 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, we have the ‘Spreadsheet From Hell’ for that.

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, qualify for all of those lovely deductions, 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 no precise number of days guidance 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 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.

Technically yes, but you probably don’t want to. Why? You are not allowed to double dip, we all know that. – When you get a housing stipend for a travel assignment, it is already under an UNTAXED umbrella. You can’t take that money, use it for your housing expenses, and then go to your tax return and claim your housing was an out-of-pocket expense. The only way you can deduct the cost of your housing on a tax return is if you used TAXED money. (Some hospitals that do seasonal contracts work this way.)

So you have 2 options: 1) Either take the tax free money, be frugal, and get to keep any extra left over money tax free (YAY!), or 2) get taxed on ALL that your company gives you (making it ‘your’ money), and then deduct the costs of your RV. Hmmmm? I am willing to bet that in 99% of the cases, you are better off following the first option. – – And I have not even discussed the term ‘personal choice’ or the issues with declaring it a business property yet…. (see next question)

Generally, no. Any IRS agent worth his pay would throw the “personal choice” phrase at you on this one. Please read the answer above. And then think of it this way: in almost every situation, your company is giving you sufficient money to get housing close to the work site. You choosing to use that money for an RV instead of the apartment is a personal choice. Your decision to not take the less expensive option was your own. – – Now we will admit that occasionally we run into a situation where an inexperienced traveler was taken advantage of and not given enough housing for the area. In that case, they can deduct the expenses that were OVER the stipend as outlined in the previous FAQ, but the traveler would have to be able to show receipts for all of it.

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 took them in —

Probably not. This is another one of those issues that many people talk about with great confidence, but have not done the research. – – For the RV to be a part of a business, you need to be able to prove a ‘business purpose’ for the RV (not just ‘personal choice’). Maybe: a nurse practitioner who specializes in culturally sensitive Native American holistic health medicine who needs to have his/her own housing on site, since rental housing on many reservations is non-existent? Yes, that is slightly exaggerated, but you would have to show a scenario where you would be unable to perform your profession WITHOUT that RV.

The second issue is once that RV was used for more than 14 personal days, (side trip to Aspen) it also no longer qualifies to be a business property.

Now, what if you actually meet the qualifications? Then yes, you can deduct pad costs, RV repairs, relocation costs, depreciation…

This is another idea that gets floated around the internet every so often. Buy an RV, but register it in another state with no sales tax. Usually, it is accompanied with the idea of incorporating a business in that state. Yeah, well… Here comes TravelTax, smashing another idea into the ground…

First, read the Q&A above to see what the requirements are for making an RV a part of your business. Not so easy. How about just registering it in another state and keep it as personal property? Then I have to ask you how solid is your tax home? If you spend several months a year at your tax home, own your home there, even have a job, then you can afford to roll the dice and register the RV at another address, but too often we see travelers pulling at the thinnest of threads to justify their tax home. Registering a vehicle somewhere else could compromise it… (Sorry)

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 receipts and claim actual expenses, you cannot use the housing per diem. In addition, if staying overnight, you can also deduct the meal per diem. 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

As much as we warn travelers not to go to the same assignment over and over, because their tax home would shift to this repeating location, there is a 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: amount of income, time, and intensity of work.

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.

And just in case you are beginning to put 2+2 together, we do have clients who would have been itinerant = (no residence) but wind up having a tax home at the seasonal assignment site. They do the reverse of this Q&A. Claim no deductions for the seasonal assignment, but then get the tax free benefits while doing assignments away from there the rest of the year. They are maintaining a tax home by working, nothing else is required. Money trumps everything.

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-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, 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 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: 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. (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 (translate – a job). (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 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. Not keeping track of this could cost you $20,000 or more in allowable deductions/reimbursements.

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.

Pros:

–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.

Cons:

–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.

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 and misrepresent your tax home information. – Let us know if that happens. We may have some political clout in that area. – –Sometimes we feel like the JACHO of Tax!

2) You will hear all sorts of criticism from 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. Ignore them!

3) A tax home and a permanent residence are separate items. Continue to keep your driver’s 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.

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 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 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.

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 (Phoenix). The rest of the year, he can collect his housing tax free so long as he does not return to any other area often enough to shift his tax home.

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 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 2015, there were about 25 healthcare staffing agencies that had been involved in audits within the last 5 years touching on this issue.

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 re-characterization)

Don’t ya love soccer season!