How to Maintain a Tax Home While Traveling: Part 1

*Disclaimer: I am not a tax professional.

I get this question quite frequently so I decided it’s finally time to shed some light onto the sometimes confusing topic of maintaining a tax home with traveling healthcare.

This is actually one of the more important things to understand with traveling healthcare, because if you make a mistake and do not have or maintain your tax home the consequences can be financially dire.

The Financial Consequences of not Maintaining a Tax Home

First off, if you don’t have or you don’t maintain a tax home, you are ineligible for the tax free lodging, travel, and food stipends which is the primary source of increased income that comes with traveling healthcare.  Without this, the benefits of traveling no better than that of working a full time job anywhere else.

Secondly, if you claimed a tax home, get audited, and the IRS finds out that you actually were not maintaining a tax home.  You could be on the hook to pay back all of the money that you previously had collected tax free from your stipends. Ouch.

And I don’t know about you, but that money has already been invested or used to pay off debt.  So needing to pay it back, would put me in quite the financial predicament.

So the moral of the story is that we need to maintain a tax home and need to be take the correct steps to do so. But let’s start from the top.

So What is a Tax-Home?

The IRS defines your tax home as your “regular place of business” or the place one makes the majority of their income.  Hence why it is often called one’s economic home.

However, as travelers, we don’t maintain a tax-home since we don’t have on location in which we earn income, so our tax home then becomes the location where we maintain our permanent home and the place that we are taking on expenses still while we are on the road.

So because we are maintaining this permanent home and paying expenses on the road, we qualify for tax free stipends.

What is Required to Maintain a tax-home?

The general rule of thumb to maintain a tax home is to:

1 ) Have regular employment within your tax home area.  So for travelers who work a part time job near home for part of the year, this would suffice for maintaining your tax home while away.  However, this is not me or most of my fellow travelers.

2 ) Have a permanent residence at your tax home/the tax payer has duplicated living expenses.  This is where we will focus our attention going forward.

3a ) Return home to maintain ties to your tax home. See Part 2 

3b ) The tax payer has not abandoned their declared tax home. See Part 3

Basically, if you own or rent a place within the location that you work at for at least 25% of the year, making sure not to work more than 25% of the year in a separate location, then you have maintained all 3 criteria and you guarantee your ability to qualify for tax free stipends when working away from home.

However, if you meet one or less of the categories, you are considered an itinerant worker and you will surrender your tax free stipends. Itinerant worker meaning someone who maintains no permanent residence which means they will never be considered as “working away from home”. Meaning no stipends for you.

But as mentioned, most of us travelers, do not fulfill category 1.  So we need to take extra time to make sure we sufficiently cover categories 2 and 3. Because when we cover 2 of 3 categories, the IRS/courts will make a judgement call based on the documentation and facts you use to support your claim for meeting categories 2 and 3.

So What Should You Do If You Don’t Own or Rent a Place Currently?

Which is the exact situation that I fall into.  I don’t own a home, and because I am traveling, it just doesn’t make sense for me to pay rent back home AND pay rent at a place near my assignment.  It defeats the entire purpose of traveling healthcare as now you are wiping out most of the income bump that traveling offers.

So where does that leave us?  As mentioned, we still need a tax home to qualify for these stipends.  So we need to create a tax home.

Creating a Tax Home/Meeting Category 2

Most of us have a family home, one of which we probably did or still have a bedroom in.  So what I do and what I suggest you to do, is rent a room from your parents. A friend can work just the same if family doesn’t work given your unique scenario but family is usually easier as they normally are established in a location and won’t be moving anytime soon.

How to Correctly Rent a Room from Family or Friends to Avoid Losing Your Stipend?

Step 1: Go on Craigslist, Zillow, etc and look up what a one bedroom rental is renting for in the area that your family lives in.

Step 2: Print this ad out so you have a physical copy.  This proves what the fair market value of a room near your parents home is.  You won’t be able to rent a room from your parents for $1, it needs to be in line with what rooms in the area are renting for.

*Make sure to repeat this step every year or so as rent prices do fluctuate year to year.

Step 3: Create a rental lease using some of the free sites such as Rocket Lawyer for example.  Put in the agreed upon rent, the leasing terms, etc.  Then have you and a parent sign the binding contract.  Print this contract for potential audit purposes.

Step 4: Every 1^st of the month, write a check, Venmo, etc the agreed upon rent to your parents.  There must be a paper trail of money.  I personally use Venmo and make sure to label each one as  “March Rent”, etc.

Step 5: To guarantee this strategy works to satisfy category 2, your parents should file your rent payment as income.  This is up to your discretion, it depends how closely you want to toe the line.

Step 6: This is obviously your parents choice, but my parents choose to gift me my monthly rent money back. To be completely transparent, my parents actually put my rent money towards my loans for me. However, this is not required of your parents, it is their money as indicated by your leasing agreement.

Note: Make sure to always pay on time, and treat this as a real lease because in reality it is a lease.  You are maintaining a permanent residence, it just happens to be at your parents house.

This may seem like I am skirting around the rules.  But, I am paying rent and maintaining a tax home.  What my parents decide to do with their rent money is completely at their discretion. They just happen to choose to put it towards my loans.  There is not a tax penalty from parents gifting money to their kids, otherwise every college kid driving around in a BMW bought with daddy’s money would be in trouble.

*If you have further questions, talk to a tax expert or adviser.

Making Sure Your Tax Home is Far Enough Away from Your Travel Assignment

The last thing to be aware of is making sure the distance of your tax home and your travel assignment follow the IRS guidelines if you are planning to travel local.  This is the other way that I see travelers surrender their stipends.

Because this is a longer answer in itself, I created a separate post to better explain this common concern.

Conclusion

Following these steps does not guarantee that I’ll be covered but it is setting myself up with the most defensible documentation possible in case I do ever get audited.

Overall, I understand that this seems complicated but tax law is complicated.  It really becomes more smooth once you take the initial time to set everything up.  Yes, the chances of getting audited are slim but the financial consequences of not being prepared could wipe out a lot of your hard work.  So do what’s necessary now to avoid these issues in the future.

As always, if you have any questions, please feel free to comment below or if you have any personal questions or want to get in contact with my awesome recruiter, contact me here!

Advance to Part 2