What’s Your Tax Home? And Does It Change When You Travel?
Most travelers are aware of the 12-month rule that limits work in the same area to one year: Any commitment beyond 12 months disqualifies an individual from receiving housing, housing allowances, stipends or meal per diems on a tax-free basis as the tax home shifts to the work location regardless of short breaks or trips home.
Established by the U.S. Congress as a benchmark to define temporary versus indefinite work, the 12-month rule anticipates that someone working in an area longer than a year would be expected to move his or her primary residence closer to the source of income.
A tax home is your primary place of income—not your permanent residence or your family home, but the geographical area that provides your income. And there are other ways your tax home can change.
When travelers don’t have a primary place of income, their tax home often defaults to the place where they have significant expenses in maintaining a primary residence. This is important since frequent or seasonal assignments in the same metropolitan area can also shift the tax home. Over a span of years, repetitive assignments in the same area will create a primary place of income regardless of the fact that the assignments were less than 12 months. For example, if my home is in Boston and I have no income in that area, but regularly work three-month seasonal assignments in Denver and nine months of assignments elsewhere (or do not work the rest of the year), my tax home is Denver since it’s a consistent and substantial source of income for me each year. Again, since a tax home is the primary place of income, the fact that I have a mortgage in Boston is irrelevant. Each year, most of my income is derived in Denver and the Boston home becomes a personal choice, not a business necessity. If I had income in Boston that equaled or exceeded my income from Denver each year, then my tax home could remain in Boston.
What’s the takeaway? Since a good IRS auditor can open an examination for up to three years (four with good timing), and since multi-year audits are expected to become more common in the future, savvy long-term travelers will be wise to review their assignment histories to ensure they do not mistakenly put their tax home at risk with repetitive assignments in the same area.
ABOUT THE AUTHOR
Joseph Smith is an IRS Enrolled Agent and former travel respiratory therapist whose firm (TravelTax LLC) provides tax preparation and audit representation for the mobile professional. He is a regular contributor to Healthcare Traveler and LocumLife and is a speaker at the annual Travel Medical Professionals Convention.