Guest Article via Joseph Smith @ TravelTax.com
Written prior to tax reform 2017. Watch for future articles.
What is Tax Home “Abandonment”?
How does tax home abandonment affect the Travel Nurse? What can you do to protect yourself? Joseph Smith from TravelTax.com helps make some sense of this confusing issue.
Many travelers have asked us about recently updated agency policies that require a traveler to return home and either work locally or stay at home for 30 to 45 days every two years. The conversation goes along these lines: “You have been traveling for two years. You need to go home for 45 days and work or you will lose your tax home”. There are variations of this conversation, but the policies require the traveler to go home after 2 years of service.
First, this is an Agency rule. Not something from the tax code.
Unfortunately, it is made out to be an IRS rule which is misleading. So why are many agencies adopting this rule? The returns home are an attempt to avoid the “abandonment rule” that is a part of the regulations regarding a tax home.. A tax home is an economic home (not a permanent residence – those are two different concepts). In other words, it is where one works, not where they live. If a person has 1 permanent job, the area of that job is their tax residence whether they drive 1 mile or 100 miles commuting. Due to the temporary nature of their contracts, a traveler does not have a primary job site unless they stay in the same area over a year, or have repetitive assignments in the same area over 2 or more years.
When one does not have a primary area where they earn their income, the tax home can default to the permanent residence provided they pass two of three of the following tests.
- Have significant income at home
- Have substantial expenses maintaining their residence which are duplicated while on assignment
- Have not abandoned their historical area of work and residence
The agency rules requiring a return home are addressing abandonment in criteria #3. A few examples can help explain how this is applied:
- Situation 1: Traveler X does not return home for 3 years.
- Situation 2: Traveler X returns home 15 days a year for a vacation
- Situation 3: Traveler X comes home 30+ days a year
Traveler 1 has a problem.
A three-year absence without returning home is an abandonment of their home. Going away three years without a return home generally means they will continue the process. Since tax return audit cycles are 3 years (A 4-year-old return cannot be audited except in special circumstances), a 3-year audit will reveal continuous life on the road. They then become “iterant” as a lifestyle choice in the eyes of the IRS.
Traveler 2 has a potential problem.
Under other areas of the tax code, a principal residence is defined as a place that the taxpayer occupies more than 10% of the rented days. Though a traveler maintaining a tax residence does not rent their home in its entirety, the spirit of the rule still applies. 10% of 365 days is 36-37 days. Returns home of minimal duration does not evidence one’s commitment to a residence more than a lack of commitment or abandonment.
Traveler 3 has a substantial time investment at home and more closely follows the 10% rule
It is our experience that Traveler 3 has a lower risk of an adverse audit (not the risk of being audited, but surviving an audit), than the other 2 and we encouraged our healthcare staffing clients to make a point of spending 30 days a year at home if possible. Mobile professionals working in other industries such as the nuclear and engineering allow for different approaches.
While we like to see our clients return home for 30 days a year, this often conflicts with an agency mandate of returning home 45 days every 2 years. As many travelers know, agency rules that establish corporate due diligence before government agencies do not satisfy the traveler’s obligations. Travelers often have a higher burden of proof when under audit. Their obligations exceed that of the agency.
Would you like to learn more?
Check out the TOP 10 Questions for Travel Nurses on Taxes.