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Dear Tax Talk,
I am an engineering contractor; I get paid my base pay plus a per diem. I have been told that at the end of the first year, the per diem will also be taxed. I read in a couple of places that even after the end of the first year, I will be eligible for per diem because I have a house out of state. Or I can take a break for a week or two and then it will be counted as a new contract year/term. I looked at the IRS Web site and the guidelines are not clearly laid out for this.
When you’re looking at travel costs, you start with the premise that everyone has a “tax home.” When you travel away from your tax home on a temporary basis, your travel expenses are deductible or, if reimbursed as in your case, not taxable. 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 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 one year or less.
However, if your assignment or job is indefinite, the location of the assignment or job becomes your new tax home. 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. An assignment or job in a single location is considered indefinite if it is realistically expected to last for more than one year, whether or not it actually lasts for more than one year.
In your case, your assignment to a new city was meant to last for more than one year when you began it. None of your per diem for the first year can be excluded from your income. The new city has become your tax home from the beginning of your assignment there. Even if you took a week’s break, your assignment is still in the same new city and would not affect the taxation of your allowance. The IRS Publication 463 provides additional guidance on travel away from home.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.