Tax Home: IRS Definition and Implications

Jul 2, 2024

For US expats navigating the complexities of tax obligations, understanding the concept of a “tax home” is crucial. The tax home test is essential in determining eligibility for certain tax benefits, such as the foreign earned income exclusion, foreign housing exclusion, and foreign housing deduction. This article aims to clarify what constitutes a tax home, how it’s defined by the IRS, and its implications for US expats.

What Is the Definition of a Tax Home?

The IRS defines your tax home as the general geographic area of your regular place of business or employment, not necessarily where your personal residence is located, based on where you incur regular living expenses.

Tax home definition IRC

Key Points of IRS Definition:

  1. General Area of Business Activity: The IRS defines your tax home as the “entire city or general area” of your regular workplace or place of business, regardless of where your personal residence is located.
  2. Multiple Workplaces: If you have multiple workplaces, your tax home is generally the location where you spend the most time and have the greatest business activity. For example, if you spend more time and conduct more business in New York compared to London, New York would be considered your tax home.
  3. No Fixed Workplace: For those without a fixed workplace, such as itinerant workers or remote employees, your tax home may be the place where you regularly live. This can apply even if this location is not where you conduct the majority of your business activities.
  4. Maintaining a Residence: To establish a tax home, you need to maintain a residence in that location and incur regular living expenses such as rent, mortgage, utilities, and other day-to-day expenses. Using a relative’s address or a nominal rental arrangement does not qualify as maintaining a tax home.
  5. Travel Expense Deductions: The location of your tax home is important because it determines whether your travel expenses away from that location can be deducted as business expenses.
  6. Distinction from Permanent Residence: Your tax home is distinct from your permanent residence or domicile. While your permanent residence is your long-term, permanent home where you intend to return, your tax home is your primary place of business or employment.

What does it mean to have a tax home? Example Scenarios:

Example 1: An oil rig worker who works on an offshore oil rig for 28 days and returns to a family home in the US for 28 days does not establish a tax home in the foreign country. The IRS considers the US as the abode due to the regular return.

Example 2: A marketing executive transferred to London for a minimum of 18 months, who sets up residence there and conducts main business activities in London, would establish London as the tax home. Individuals can deduct travel expenses paid or incurred for temporary work assignments away from their tax home, but not for indefinite work assignments.

How to Determine Your Tax Home?

To determine this, consider the following factors:

  • Location of Main Work: The IRS considers where your main work activities are conducted. For instance, if your primary job is in London, even if your family home is in New York, London would be your tax home.
  • Duration and Nature of Work: The IRS looks at how long and how consistently you work in a particular location. Temporary assignments do not typically establish a tax home.

Your primary place of business impacts allowable tax deductions for business travel, as expenses incurred while traveling for work can only be claimed if they are away from this location.

Temporary or Indefinite Assignment

Temporary Assignment: If you are temporarily absent from your US tax home on business, you may still deduct away-from-home expenses but do not qualify for the foreign earned income exclusion. When you deduct expenses for business travel, it’s important to understand the rules and limitations associated with what qualifies as deductible travel expenses.

Indefinite Assignment: If your work assignment is for an indefinite period, typically more than one year, your new place of work becomes your tax home, making you eligible for certain exclusions.

Impact on the Foreign Earned Income Exclusion?

Your tax home plays a crucial role in determining your eligibility for the Foreign Earned Income Exclusion (FEIE). To qualify for the FEIE, which allows you to exclude a certain amount of foreign earned income from U.S. taxation, your tax home must be in a foreign country. This means that your primary place of business or employment must be outside the United States.

Additionally, you must meet either the bona fide residence test, which requires living in a foreign country for an entire tax year, or the physical presence test, which requires being physically present in a foreign country for at least 330 full days within a 12-month period.

How Do You Determine Deductible Travel Expenses?

If your tax home is in a foreign country, you can deduct travel expenses such as airfare, transportation to and from the airport or train station, lodging, and meals while on a business trip. These expenses must be ordinary and necessary for your business. The IRS considers your tax home to be the location where you regularly work or conduct business, even if you have more than one place of business.

Example:

A self-employed consultant working in Tokyo can deduct travel expenses, housing expenses, and other business-related expenses incurred while living and working in Tokyo. This can significantly reduce the tax liability by lowering the adjusted gross income.

What Are the Important Considerations for Self-Employed Individuals?

For self-employed US expats, determining your tax home involves understanding where you conduct your main business activities. To establish a tax home, you need to regularly work in the area and incur ordinary and necessary living expenses there. If you have multiple business locations, your tax home is the one with the greatest business activity and time spent.

Filing Your US Expat Tax Return

When filing your US tax return, it’s essential to accurately report your tax home and claim any applicable exclusions or deductions. Here are key steps to follow:

  • Form 2555: Use Form 2555 to claim the foreign earned income exclusion and the foreign housing exclusion or deduction. Ensure you meet the bona fide residence or physical presence test.
  • Supporting Documentation: Maintain detailed records of your expenses, including receipts for travel, rent, utilities, and other deductible costs.
  • Professional Assistance: Consider consulting with tax professionals who specialize in expat taxes to ensure compliance and maximize your tax benefits.

Understanding your tax home is essential for US expats to navigate their tax obligations effectively. By establishing your primary place of business in a foreign country and meeting the necessary tests, expats can benefit from exclusions and deductions that significantly reduce their taxable income. This can lead to substantial tax savings, especially for self-employed individuals who can claim the foreign housing deduction.

At 1040 Abroad, we specialize in assisting US expats with their tax needs. For personalized advice and support, contact us today. We offer free email tax consultations. Our team of enrolled agents is here to help you maximize your expat tax benefits and ensure compliance with IRS regulations.

Written by

Kasia Strzelczyk, EA

A certified accountant and IRS enrolled agent with over 8 years of experience working with US expats. With a deep understanding of the unique financial challenges faced by expats, Kasia is dedicated to helping clients navigate complex tax laws and regulations.

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