Tax Home - Explained
What is a Tax Home?
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What is a Tax Home?
Tax home refers to where your main regular business location is situated, post duty station or employment. In other words, your home tax is the overall area in which your workplace or business is located regardless of where your family resides. Therefore, your tax home is not necessarily where your residential home is, but where you earn most of your income. However, if there is no permanent workstation for your business, then where you stay more often becomes your tax home. If you have neither of them, then it means you are roving and so, wherever you work will be your home tax.
How Does a Tax Home Work?
To be able to deduct your traveling expenses when you go away from your residential home on either a business errand or on official duty, two things must be considered:
- You will be required to determine the location of your tax home in case you have one.
- You will also need to prove that the business assignment demands that you travel out of your tax home.
If you are able to meet the above two conditions, only then can you qualify for travel expenses deductions. Meaning it is through determining home tax that your travel expenses such as transportation, lodging, meals, and other expenses are deducted because such expenses according to IRS, are considered to be tax-free.
Example of How Tax Home Works
Note that if an individuals work requires him or her to be away for work for some time (usually a period longer than the normal workday), then all her travel expenses are considered to be tax-free. Lets assume that Johns home is in New Jersey but his work station is in New York City. In this case, all the business expenses such as travel, lodging, and meals in New York City are not tax-deductible because it is considered Johns tax home. On the other hand, business expenses to New Jersey during weekends are not deducted since they are not related to official duties (not work-related). However, if John travels to Chicago for Work, then all the business expenses will be deducted.
An Employee with no Regular Workplace
For an employee with several workplaces, the Internal Revenue Service (IRS) will require that employee to select one specific place he or she will consider work home. However, there are several criteria for doing that and they include the following:
- Consider the time you spend in each workplace
- The workload for each workplace
- The amount of income you generate in each place
However, for a person that has no regular workplace meaning that he travels in several work locations, the tax home for such an individual according to IRS will be that persons permanent residence. On the other hand, where a person does not have a regular workplace and a permanent home address, that person according to IRS is an itinerant. An itinerant in this case does not qualify to deduct any traveling expenses because he or she is never away from home. Note that expenses that a person incurs for traveling away from home on official duty are deductible expenses. That is why an itinerant does not qualify for this kind of deduction because he does not have a tax home. Also, these expenses do not incorporate expenses for commuting because according to IRS, such expenses are not subject to deduction. Commuting expenses here may refer to driving expenses from your residential home to your work location. In other words, commuting expenses are not considered to be tax-free.
United States Citizens with Foreign Earned Income
For the United States citizens to be eligible for certain tax benefits, they need to have a tax home in a foreign country. This will enable them to qualify for tax benefits such as:
- Foreign earned income exclusion
- Foreign housing exclusion
- Foreign housing deductions
For instance, here is an individual working in the Netherlands. His work schedule is that he works for 60 days and then goes for an off of 30 days. While off duty, he goes back to the United States to be with his family. In such cases, the IRS considers the United States to be this persons abode and, therefore, the person does not meet the tax home requirements in the foreign country. Note that effective December 31, 2017, there is no tax home consideration for a worker in a foreign country for a period when one is abode in the United States. Not unless this person serves in the United States Armed Forces and in an area considered to be a combat zone. In general, it is important to note that someones abode is determined by where the person maintains personal ties such as family and economic activities.
About Temporary or Indefinite Assignment
An American citizen, who goes for a short-term work assignment (temporary assignment) outside his United States tax home, is eligible for travel expenses deduction. However, according to IRS, foreign earned income exclusion does not apply to such as an individual. On the other hand, if the assignment forces that person to be away for more than a year, then according to IRS, it is an indefinite period. In such cases, the place of assignment for this particular individual will be his tax home. This means that any expenses incurred while in this tax home is not subject to deduction. Also, if the new tax home happens to be in a foreign country and he meets the requirements for the foreign tax home, then whatever he earns is likely to qualify for foreign earned income exclusion.
Importance of Tax Home
A tax home is important for the following reasons:
- It helps in calculating tax obligations.
- It helps during the calculation of moving expenses.
- Tax home declaration helps the taxpayer to be able to claim travel expenses deduction.
Generally, it is worth noting that although IRS does consider deduction of travel expenses, it, however, limits it to 2% of a taxpayers gross income.