Tax Advantage--"tax-free" stipend if no permanent residence?

NedRN · Apr 1, 2014

If you want lots of detail on tax advantage, go to PanTravelers or TravelTax.

A permanent home is not the right phrase, it is tax home (they are very different). You are planning on being itinerant (without a home for tax purposes) and thus cannot claim any business expenses for working away from home. That is all housing, travel, and per diems really are: reimbursements for the added expenses incurred for working away from home. If you had a tax home, you could also deduct those expenses

If you are being paid on a 1099 basis, you have to pay state, federal, local (if any) taxes as well as 15.3 percent FICA. But that doesn't really change anything about a tax home, you will still owe taxes on everything you earn without a tax home.

Establishing a new tax home requires professional help. Using an address of convenience, such as your parents address, does not establish a tax home. You have to live there, return regularly, and have costs associated with maintaining a residence, such as rent and utilities.

Here is an excerpt from IRS Publication 463 with some of the fundamentals:

[h=4]Tax Home[/h]

To determine whether you are traveling away from home, you must first determine the location of your tax home.

Generally, your tax home is your regular place of business or post of duty, regardless of where you maintain your family home. It includes the entire city or general area in which your business or work is located.

If you have more than one regular place of business, your tax home is your main place of business.

If you do not have a regular or a main place of business because of the nature of your work, then your tax home may be the place where you regularly live.

If you do not have a regular or main place of business or post of duty and there is no place where you regularly live, you are considered an itinerant (a transient) and your tax home is wherever you work. As an itinerant, you cannot claim a travel expense deduction because you are never considered to be traveling away from home.

Main place of business or work. If you have more than one place of work, consider the following when determining which one is your main place of business or work.

The total time you ordinarily spend in each place.
The level of your business activity in each place.
Whether your income from each place is significant or insignificant.

Example.

You live in Cincinnati where you have a seasonal job for 8 months each year and earn $40,000. You work the other 4 months in Miami, also at a seasonal job, and earn $15,000. Cincinnati is your main place of work because you spend most of your time there and earn most of your income there.

No main place of business or work. You may have a tax home even if you do not have a regular or main place of work. Your tax home may be the home where you regularly live.

Factors used to determine tax home. If you do not have a regular or main place of business or work, use the following three factors to determine where your tax home is.

You perform part of your business in the area of your main home and use that home for lodging while doing business in the area.
You have living expenses at your main home that you duplicate because your business requires you to be away from that home.
You have not abandoned the area in which both your historical place of lodging and your claimed main home are located; you have a member or members of your family living at your main home; or you often use that home for lodging.

If you satisfy all three factors, your tax home is the home where you regularly live. If you satisfy only two factors, you may have a tax home depending on all the facts and circumstances. If you satisfy only one factor, you are an itinerant; your tax home is wherever you work and you cannot deduct travel expenses.

Example 1.

You are single and live in Boston in an apartment you rent. You have worked for your employer in Boston for a number of years. Your employer enrolls you in a 12-month executive training program. You do not expect to return to work in Boston after you complete your training.

During your training, you do not do any work in Boston. Instead, you receive classroom and on-the-job training throughout the United States. You keep your apartment in Boston and return to it frequently. You use your apartment to conduct your personal business. You also keep up your community contacts in Boston. When you complete your training, you are transferred to Los Angeles.

You do not satisfy factor (1) because you did not work in Boston. You satisfy factor (2) because you had duplicate living expenses. You also satisfy factor (3) because you did not abandon your apartment in Boston as your main home, you kept your community contacts, and you frequently returned to live in your apartment. Therefore, you have a tax home in Boston.

Example 2.

You are an outside salesperson with a sales territory covering several states. Your employer's main office is in Newark, but you do not conduct any business there. Your work assignments are temporary, and you have no way of knowing where your future assignments will be located. You have a room in your married sister's house in Dayton. You stay there for one or two weekends a year, but you do no work in the area. You do not pay your sister for the use of the room.

You do not satisfy any of the three factors listed earlier. You are an itinerant and have no tax home.

[h=4]Tax Home Different From Family Home[/h]

If you (and your family) do not live at your tax home (defined earlier), you cannot deduct the cost of traveling between your tax home and your family home. You also cannot deduct the cost of meals and lodging while at your tax home. See Example 1 , later.

If you are working temporarily in the same city where you and your family live, you may be considered as traveling away from home. SeeExample 2 , later.

Example 1.

You are a truck driver and you and your family live in Tucson. You are employed by a trucking firm that has its terminal in Phoenix. At the end of your long runs, you return to your home terminal in Phoenix and spend one night there before returning home. You cannot deduct any expenses you have for meals and lodging in Phoenix or the cost of traveling from Phoenix to Tucson. This is because Phoenix is your tax home.

Example 2.

Your family home is in Pittsburgh, where you work 12 weeks a year. The rest of the year you work for the same employer in Baltimore. In Baltimore, you eat in restaurants and sleep in a rooming house. Your salary is the same whether you are in Pittsburgh or Baltimore.

Because you spend most of your working time and earn most of your salary in Baltimore, that city is your tax home. You cannot deduct any expenses you have for meals and lodging there. However, when you return to work in Pittsburgh, you are away from your tax home even though you stay at your family home. You can deduct the cost of your round trip between Baltimore and Pittsburgh. You can also deduct your part of your family's living expenses for meals and lodging while you are living and working in Pittsburgh.

[h=4]Temporary Assignment or Job[/h]

You may regularly work at your tax home and also work at another location. It may not be practical to return to your tax home from this other location at the end of each work day.

Temporary assignment vs. indefinite assignment. If your assignment or job away from your main place of work is temporary, your tax home does not change. You are considered to be away from home for the whole period you are away from your main place of work. You can deduct your travel expenses if they otherwise qualify for deduction. Generally, a temporary assignment in a single location is one that is realistically expected to last (and does in fact last) for 1 year or less. However, if your assignment or job is indefinite, the location of the assignment or job becomes your new tax home and you cannot deduct your travel expenses while there. An assignment or job in a single location is considered indefinite if it is realistically expected to last for more than 1 year, whether or not it actually lasts for more than 1 year. If your assignment is indefinite, you must include in your income any amounts you receive from your employer for living expenses, even if they are called travel allowances and you account to your employer for them.

ladsten011 · Apr 1, 2014

I knew I could count on you, NedRN. For anyone else interested, this TravelTax website provides a really good breakdown and a lot of information: FAQ Traveling Tax Issues

I do have follow-up questions, though. Bear with me, as I'm just getting my feet wet with all of this (and I'm a dummy when it comes to taxes).

--If I tell the agency that I am an itinerant worker:

1) I was planning on taking the housing option (agency finds housing for me) and not the reimbursement to find my own. This might be agency specific, but how does being an itinerant affect this option?

2) Will I see a change/disappearance of the stipend/reimbursements (and this maybe would be reflected in a higher hourly pay)? Or will I just pay tax on everything I'm being reimbursed for (travel, housing)?

Thanks in advance.

NedRN · Apr 1, 2014

If you are itinerant, your housing benefit must be taxed, whether provided or a stipend.

There is this concept of wage re-characterization that is technically illegal, that is sheltering taxable income as non taxable reimbursement on an ad hoc and often negotiated basis. So the supposedly correct way that TravelTax preaches and a number of agencies actually do is pay stipends exactly the same for travelers with tax homes and itinerant travelers, and just change the taxation. So the hourly rate won't change.

Agencies have a quandary in doing it that way though. Employers pay payroll taxes (social security, Medicare, disability, unemployment) that are hidden from the traveler and amount to about 10 percent of taxable pay. Let's say there is normally about $20 an hour in non-taxed pay for a traveler with a tax home. If that traveler is now itinerant, the agency has an extra $2 an hour in extra tax burden. That is a large percentage of the normal amount of gross profit the agency expects to make from an assignment. So the way to fix it before is lower the pay of the affected traveler. How to do it now without wage re-characterization based on tax status? It is a problem. Do you lower the pay of all travelers to compensate?

This is also a competitive disadvantage. Traveler pay is based on competition and supply and demand. If you are paying less than another agency, you can't expect to attract the same quality or quantity of travelers. Because of this, many recruiters know they will lose a travel prospect to another agency. Thus they will often coach the traveler to just use their parents or a friend's address on the housing form so that (from the agency perspective) they can pay tax advantage legally. And lots of travelers do just this.

From a high level perspective, there is not a lot of risk, at least in the past to doing just this. Your audit risk actually goes down with decreased annual reported income. But if you don't have a tax home, if you get audited for any reason, your costs can be more than you might afford, perhaps as much as $50,000 after three years of traveling between back taxes, interest, and penalties. The rewards of tax advantage are probably not worth this admittedly small risk because the penalties for failure are too high. Most travelers may not know there is such a risk at all, much less really consider the possible consequences.

So what are the real benefits to tax advantage so you can properly consider either having a tax home, or lying about one? For the average traveler, it amounts to around $10,000 to $12,000 more net income, the amount you can put in the bank. Weigh this against the costs of maintaining a tax home (rent or mortgage, etc.). Often it can be a wash versus being itinerant and less to worry about if you tax everything.

There are some disadvantages to tax advantage if you travel long term. Social Security retirement pay is based on lifetime earnings and obviously will suffer if you make only half as much taxable Social Security pay. For a disciplined saver, that is not a big downside, the numbers are just amazingly better if you put that tax advantage into saving over decades (you will have 10 times more retirement savings). Most people cannot do that which is why SS is such a good safety net of course, but as an investment, it barely returns what you pay into it. Should you need unemployment benefits, those will also be much lower. Disability usually will consider your entire compensation package but often you have to fight for it. Finally, some banks weight their loan eligibility heavily on 1040 income so getting a home loan could be more difficult.