What Is a Tax Home?

A tax home is the general locality of an individual's primary place of work. It is the city or general vicinity where their primary place of business or employment is located, regardless of the location of the individual's residence. An individual’s tax home has an effect on their tax deductions for business travel.

Key Takeaways

  • A tax home is the general locality of an individual's primary place of work.
  • The location of a person's tax home has an impact on their tax deductions for qualified business travel.
  • Tax home is determined as the place a taxpayer spends most of their time.

Understanding Tax Home

A taxpayer’s tax home refers to the geographical region where they earn the majority of their income, regardless of their permanent residence. While a permanent residence is the mailing address of an individual, the tax home is the location used to determine where a taxpayer has deductible travel expenses.

The tax home determines whether business expenses for transportation, meals, and lodging will be treated tax-free. The Internal Revenue Service (IRS) considers an employee to be traveling away from home if their business obligations require them to be away from their tax home for a period longer than an ordinary work day. If an employee works in New York City, for example, but lives in New Jersey, the tax home is New York City. In this example, travel, meals and lodging expenses in New York City cannot be deducted since that is the individual's tax home. Travel expenses to New Jersey on the weekends cannot be deducted since they would not be work-related expenses. If the same worker travels for work to Chicago, however, any travel, meals, and lodging expenses may be deducted.

Working in More Than One Place

Some people, due to the nature of their jobs, work in more than one place. For such a worker, e.g. a freelance web designer, their tax home is the general area where their main place of business or work is located. A taxpayer’s main place of work is determined by how much time they spend at each location for business purposes; how much work they do in each place, and; how much money they earn in each place. Of the three, the most important consideration is the length of time spent at each location.

For workers, such as healthcare workers, that have no fixed workplace and travel to numerous locations for work assignments, the IRS considers their tax homes as their city of permanent residence or where they regularly live. A taxpayer that has neither a main place of business nor a place where they regularly live is considered an itinerant. The tax home of an itinerant, such as an outside salesperson, is wherever they work since they are never really away from home, which means that they cannot write off any travel expenses.

U.S. Citizens With Foreign Earned Income

Citizens of the U.S. must have their tax homes in a foreign country if they are to qualify for certain tax benefits such as the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction. For example, consider a worker that works in the Netherlands on a 60-day on/30-day off schedule. During their off periods, they return to their family in the U.S. The IRS considers their abode the United States and, hence, the worker does not satisfy the tax home test in the foreign country. The IRS states that for tax years beginning after Dec. 31, 2017, a worker is not considered to have a tax home in a foreign country for any period during which their abode is in the United States unless they are serving in support of the Armed Forces of the United States in an area designated as a combat zone. The location of one’s abode is based on where they maintain family, economic, and personal ties.

Temporary or Indefinite Work Assignments

An individual that has a temporary work assignment outside their U.S. tax home can deduct travel expenses paid or incurred but would not qualify for the foreign earned income exclusion. Any work assignment that is for more than one year is considered indefinite. If a taxpayer’s work assignment is for an indefinite period, the place of their assignment is their tax home, and they would not be allowed to deduct any of the related expenses that they incur in their tax home. In addition, if their new tax home is in a foreign country and they meet the foreign tax home requirements, their earnings may qualify them for the foreign earned income exclusion.