After a day of managing potent medications on a critical patient, one would think that unraveling the concept of tax home would be an easy task. Unfortunately, the concept of a tax residence is very similar to an ACLS algorithm which few of us actually master unless we routinely manage codes or are lucky enough to have extra room in our scrub pockets to carry around an ACLS flow chart. So what really is a Tax Home?
The complexity of a tax home determination is mind boggling. However, it is the litmus test of the taxability of per diems (also known as stipends, allowances, subsidies or any other word that identifies tax free reimbursement payments). The confusion is exacerbated by agencies, recruiters and executives who only know part of the rules. Like a patient that knows enough about a diagnosis to be dangerous, players in the healthcare staffing industry are just as suspicious. Unfortunately, the same applies to many tax professionals who stumble over the rules with equal blindness.
When I was a respiratory therapy traveler in the early1990’s, I had a newly minted BA in Accounting to compliment my Respiratory Therapy degree. Even with that lethal cocktail, I knew little about the tax treatment of per diems. Taxation was only one class of the accounting curriculum which explains why a lot of CPA’s are not tax experts. Public accounting is a different animal than tax. CPA’s that want to master taxation must take the extra effort to learn that area of law just like a nurse seeking to specialize in neonatal nursing.
I started my practice out of this dearth of knowledge, and focused on the many court cases that addressed travelers in industries including healthcare engineering, nuclear, construction, and IT. Many different industries employ large numbers of temporary staff and a lot can be learned from their journeys.
So this article does not become a dissertation, the following discussion will just address the foundation of a tax home. There is no one thing that settles the issue. Just like the ACLS algorithm, the determination of tax home goes through many decision points governed by unique facts and circumstances. With later articles we explore other limitations and definitions that come into play.
Starting point: A tax home and a permanent residence are NOT the same thing!
What? What do you mean? All the agencies want to know where my permanent residence is?
This is where most of the confusion over a tax home starts as these terms are unfortunately used synonymously by many in our industry.
Permanent Residence = Legal Home / Tax Residence = Economic Home
A permanent residence is a legal concept. Ties that bind you to an area such as a driver’s license, car registration, memberships, where you get your mail, the home state of your professional practice license etc. all contribute to the location of your permanent legal home. This does not rise to the level of a tax residence and initially has NO impact on it.
A tax residence is defined by the IRS as ones principal place of business which is a loaded term that basically means the area where one makes the majority of their income. It is not where you live.
This is why it is better called an economic home. Most people work where they live, hence, their permanent and tax residences are the same place which explains the synonymously use of the terms. However, many people do not work where they live. Some have more than one permanent job, seasonal jobs or commute a significant distance to a main job. The definition of a tax residence for these individuals is no different. Their tax residence is still the location where the individual makes the majority of their income in relation to the other places of work.
Travelers occupy a different sphere. Because their work is mostly temporary, they do not have a primary place of business or income since they are in constant motion, never staying in one place more than a year. The tax code has recognized that it would be unreasonable to expect these individuals to actually move their residence to a different location with each assignment. Travelers with tax homes are never moving. They are mobilizing. The difference is those terms are important as moving involves a change of residence, while mobilizing is more of an accurate description of someone who is temporarily away from home.
How do the tax rules address the traveler?
For true “travelers” as defined above, the tax rules allow an exception to the tax home definition. Instead of looking at the primary place of income/business, it allows the tax home to default (fall back on) the permanent residence. For this to apply however, the individual must meet 2 out of 3 of the following criteria.
1) Does the individual have significant income at home?
2) Does the individual has substantial expenses maintaining their primary residence that are duplicated when on assignment
3) Has the individual abandoned their historical place of lodging and work?
Most travelers do not work at home (Criteria 1) which means that the balance of travelers must satisfy the second and third criteria to have an acceptable tax residence. They have an apartment or house that they own, duplicating these expenses when away from home on assignment. Further, their home is in the same area that it was when they started their traveling career or they established an income base in the area before traveling (Criteria 3). Some travelers keep regular jobs at home (Criteria 1) and return home on a regular basis between contracts. If the income earned from this job is significant, the requirement of a financial obligation for a residence is not as critical since they are still satisfying Criteria 1 and 3.
The next articles will analyze these criteria in detail and other nuances to the tax home definition. Keep this piece handy as we explore those areas in future installments.