What Is a Tax Home?
A tax home is the general vicinity of a person’s principal place of employment. Regardless of where the individual’s permanent house is, it is the whole city or broad area where their major place of business, job, or station of duty is situated. The tax residence of a person influences their permitted tax deductions for work trips.
- A tax home is the general vicinity of a person’s principal place of employment, regardless of where they reside.
- A person’s tax residence affects their tax deductions for qualifying business trips.
- Travel expenditures are the common and essential costs of leaving the house for work.
- Travel, housing, food, mileage, and gratuities are all deductible costs.
Understanding Tax Home
The geographical place where a taxpayer spends the most time for business reasons, independent of their permanent residence, is referred to as their tax home. While a person’s permanent residence is their postal address, their tax home is the place where they incur deductible travel costs.
If you work in more than one location on a regular basis, your tax home is the geographic region in which your principal place of business or job is situated. The quantity of time you spend at each location is the most critical factor in choosing the primary place of business.
The tax home decides whether business costs such as transportation, food, and accommodation are tax-deductible. If an employee’s business commitments necessitate them to be away from their tax residence for a duration longer than an usual workday, the Internal Revenue Service (IRS) deems them to be traveling away from home.
For example, if an employee resides in New Jersey but works in New York City, New York City is the tax home. Because New York City is the individual’s tax residence, travel, meals, and accommodation costs there cannot be deducted. Weekend trips to New Jersey cannot be deducted since they are not work-related costs. However, if the same employee flies to Chicago for business, any travel, food, and hotel expenditures may be deducted.
Working in More Than One Place
Some individuals work in many locations due to the nature of their professions. A worker’s tax home (for example, a freelance web designer) is the approximate region in which their principal place of business or job is situated. The principal place of employment of a taxpayer is decided by how much time they spend at each location for business reasons, how much labor they accomplish in each region, and how much money they make in each location. The most significant aspect, however, is the amount of time spent at each site.
Move nurses, for example, have no regular workplace since they travel to various locales for job assignments. In some cases, the tax home may be the worker’s normal residence.
An itinerant taxpayer is one who does neither have a primary location of business or duty, nor a permanent residence. An itinerant, such as an outside salesman, has their tax residence wherever they work since they are never really gone from home—which means they cannot deduct any travel expenditures.
U.S. Citizens With Foreign Earned Income
Citizens of the United States must have their tax residence in a foreign nation in order to qualify for certain tax advantages such as the foreign earned income exclusion, foreign housing exclusion, and foreign housing deduction.
Consider a worker in the Netherlands who works a 60-day on/30-day off schedule. During their downtime, they visit their families in the United States. The IRS deems their domicile to be in the United States, thus the worker does not meet the tax home test in the foreign nation.
According to the IRS, for tax years starting after December 31, 2017, a worker is not regarded to have a tax home in a foreign nation for any time in which their domicile is in the United States, unless they are working in support of the United States Armed Forces in a designated conflict zone. The location of one’s residence is determined by where they have familial, economic, and personal links.
The IRS defines “abode” as “one’s home, habitation, residence, domicile, or place of living.” “Abode” has a domestic rather than an occupational sense and is not synonymous with a tax residence.
Temporary or Indefinite Work Assignments
Individuals with temporary work assignments outside of their U.S. tax residence may deduct travel costs paid or incurred, but they are not eligible for the foreign earned income exclusion. Any job assignment that is projected to last more than a year is called indefinite (even if it does not last more than a year).
If your work assignment is indefinite, you must include in your income any sums given to you by your employer for living costs, even if they are referred to as travel allowances, and you must account to your employer for them.
If a taxpayer’s job assignment is indefinite, the location of their assignment is their tax home, and they cannot deduct any relevant costs incurred at their tax home. Furthermore, if their new tax home is in another country and they fulfill the foreign tax home rules, their earnings may be eligible for the overseas earned income exclusion.
How Do You Establish a Tax Home?
A tax home is the whole city or geographical region in which you have your principal place of business, job, or military position, independent of where you have your family home. If you don’t have a regular place of business because of the nature of your job (for example, you’re a travel nurse), your tax home might be where you reside on a regular basis. If you don’t have a regular place of employment or a permanent address, the IRS deems you an itinerant, and your tax home is wherever you work.
What Is the Tax Home Test?
The tax home test is designed to prohibit US taxpayers from taking advantage of the overseas earned income exclusion. You don’t qualify for the overseas earned income exclusion if you have a tax home or abode in the United States (the IRS defines an abode as one’s home, habitation, domicile, or place of residing). Unless you’re serving in a designated battle zone, you can’t have a tax residence in a foreign nation for any time you have an abode in the United States, according to IRC Sec 911. The exclusion for overseas earned income is selected on Form 2555, Foreign Earned Income.
What Qualifies as a Deductible Travel Expenses?
Travel expenditures are the “common and essential” costs of working away from home. Personal costs and expenses that are “lavish or ostentatious” are not deductible. An cost is deemed excessive or extravagant if it is not fair in the context. Also, beginning in 2018, corporate costs for “entertainment” (e.g., sports events, golf clubs, and theaters) are no longer deductible under the Tax Cuts and Jobs Act (TCJA).
Deductible travel costs while away from home include the following:
- Travel between your house and your work location
- Transfers from the airport or railway station to your hotel (or other type of lodging)
- Transportation from your accommodation to your workplace
- Shipping luggage and samples or displays between your permanent and temporary work sites
- Using your automobile to go to your company location
- Accommodation and non-entertainment meals
- Dry cleaning and laundry
- Business calls on a business trip
- Tips for services linked to any of these costs
- Other typical and unavoidable charges associated with your business trip
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