What Is a Tax Home?
A tax home is the general locality of an individual's primary place of work. It is the entire city or general vicinity where their principal place of business, employment, or post of duty is located, regardless of the location of the individual's primary residence. An individual’s tax home affects their allowable tax deductions for business travel.
- A tax home is the general locality of an individual's primary place of work, regardless of where they live.
- The location of a person's tax home impacts their tax deductions for qualified business travel.
- Travel expenses are the ordinary and necessary expenses of traveling away from home for work.
- Deductible travel expenses include travel, lodging, meals, mileage, and tips.
Understanding Tax Home
A taxpayer’s tax home refers to the geographical region where they spend the most time for business purposes, 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.
If you regularly work in more than one place, your tax home is the general area where your main place of business or work is located. The most important consideration in determining the main place of business is the length of time you spend at each location.
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 workday.
For example, if an employee lives in New Jersey but works in New York City, 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. However, if the same worker travels for work to Chicago, any travel, meals, and lodging expenses may be deducted.
Working in More Than One Place
Due to the nature of their jobs, some people 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 area, and how much money they earn in each place. Still, the most important consideration is the length of time spent at each location.
Some workers, such as travel nurses, have no fixed workplace because they travel to numerous locations for work assignments. In these situations, the tax home may be where the worker regularly lives.
A taxpayer who has neither a main place of business or post of duty 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 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 to qualify for certain tax benefits such as the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction.
Take, for example, a worker who 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 U.S. unless they are serving in support of the Armed Forces of the United States in a designated combat zone. The location of one’s abode is based on where they maintain family, economic, and personal ties.
According to the IRS, "abode" is one's home, habitation, residence, domicile, or place of dwelling. "Abode" has a domestic rather than a vocational meaning and is not the same as a tax home.
Temporary or Indefinite Work Assignments
Individuals who have temporary work assignments 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 expected to last for more than one year is considered indefinite (even if it doesn't actually last for more than one year).
If your work assignment is indefinite, you must include in your income the amounts your employer gives you for living expenses—even if they're called travel allowances, and you account to your employer for them.
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 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.
How Do You Establish a Tax Home?
A tax home is the entire city or general area where your main place of business, employment, or post of duty (military) is located, regardless of where you maintain your family home. If you don't have a regular place of business due to the nature of your work (for example, you're a travel nurse), your tax home may be the place where you regularly live. If you don't have a regular place of work or a place where you regularly live, the IRS considers you an itinerant, and your tax home is wherever you work.
What Is the Tax Home Test?
The tax home test intends to prevent U.S. taxpayers from abusing the foreign earned income exclusion. According to the tax home test, you don't qualify for the foreign earned income exclusion if you have a tax home or abode in the U.S. (the IRS says an abode is one's home, habitation, residence, or place of dwelling). Under IRC Sec 911, you can't have a tax home in a foreign country for any period you have an abode in the U.S. unless you're serving in a designated combat zone. The foreign earned income exclusion is elected on Form 2555, Foreign Earned Income.
What Qualifies as a Deductible Travel Expenses?
Travel expenses are the "ordinary and necessary" expenses of traveling away from home for work. You can't deduct expenses that are for personal purposes or those that are "lavish or extravagant." An expense is considered lavish or extravagant if it's not reasonable based on the circumstances. Also, under the Tax Cuts and Jobs Act (TCJA), business expenses for "entertainment" (e.g., sporting events, golf clubs, theaters) are no longer deductible, effective as of 2018.
Deductible travel expenses while away from home include amounts you pay for:
- Travel between your home and business destination
- Transportation between the airport or train station and your hotel (or other type of lodging)
- Transportation between your hotel and work location
- Shipping baggage and sample or display material between your regular and temporary work locations
- Using your car while at your business destination
- Lodging and non-entertainment-related meals
- Dry cleaning and laundry
- Business calls while on a business trip
- Tips you pay for services related to any of these expenses
- Other similar ordinary and necessary costs related to your business travel