Tax Home Explained: Implications, Tests, and Deductible Expenses
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Summary:
A tax home defines the primary locality of an individual’s work, impacting tax deductions for business travel. This article explores the concept, its implications, and the tax home test, offering insights into deductible travel expenses. Whether you’re a frequent traveler or working in multiple locations, understanding your tax home is crucial for optimizing tax benefits.
What is a tax home?
A tax home is the general locality of an individual’s primary place of work, irrespective of their permanent residence. It significantly influences allowable tax deductions for business travel, shaping the entire city or vicinity where the principal place of business is located.
Understanding tax home
A taxpayer’s tax home is the geographical region where they spend the most time for business purposes. It determines deductible travel expenses, distinct from their permanent residence, which is merely a mailing address.
If an individual regularly works in more than one place, the tax home is the general area where their main place of business or work is located. The IRS considers an employee to be traveling away from home if business obligations require them to be away for a period longer than an ordinary workday.
For instance, if an employee lives in New Jersey but works in New York City, the tax home is New York City. Travel expenses in New York City cannot be deducted, but those for work-related travel to other locations, like Chicago, may be eligible for deductions.
Working in more than one place
Some professionals, like freelance web designers or travel nurses, work in multiple locations. Their tax home is determined by factors such as time spent, work done, and earnings at each location. Travel nurses, for example, may consider their tax home to be where they regularly live.
Itinerant taxpayers, like outside salespersons with no fixed workplace, have their tax home wherever they work but cannot claim travel expenses.
U.S. citizens with foreign earned income
To qualify for certain tax benefits, U.S. citizens must have their tax homes in a foreign country. The IRS considers one’s abode as their home, habitation, residence, domicile, or place of dwelling. However, abode has a domestic meaning and is distinct from a tax home.
Temporary or indefinite work assignments outside the U.S. impact tax home considerations. Travel expenses can be deducted for temporary assignments, but if the work assignment is indefinite, the place of assignment becomes the tax home, affecting deductions and eligibility for the foreign earned income exclusion.
How do you establish a tax home?
A tax home encompasses the entire city or general area where your main place of business, employment, or post of duty is located. Even without a regular place of business, your tax home could be where you regularly live. If you lack both, the IRS considers you an itinerant, and your tax home is wherever you work.
What is the tax home test?
The tax home test prevents abuse of the foreign earned income exclusion. You won’t qualify if you have a tax home or abode in the U.S. during the exclusion period. The foreign earned income exclusion is elected on Form 2555, Foreign Earned Income.
What qualifies as deductible travel expenses?
Travel expenses are “ordinary and necessary” costs of traveling away from home for work. Deductible expenses include travel, lodging, meals, mileage, and tips. However, expenses for personal purposes or those deemed “lavish or extravagant” are not deductible under the Tax Cuts and Jobs Act (TCJA) since 2018.
Frequently asked questions
What is a tax home?
A tax home is the general locality of an individual’s primary place of work, impacting tax deductions for business travel.
How do you establish a tax home?
A tax home is established in the entire city or general area where your main place of business, employment, or post of duty is located.
What qualifies as deductible travel expenses?
Deductible travel expenses include travel, lodging, meals, mileage, and tips incurred while away from home for work purposes.
Key takeaways
- Understanding your tax home is crucial for optimizing tax deductions, especially for business travel.
- Professionals working in multiple locations need clarity on determining their tax home.
- U.S. citizens can benefit from foreign earned income exclusion with the right tax home considerations.
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