Enjoy Your New Home but Don’t Forget the One Year Rule
By Joseph Smith EA / MTax, contributor
One great benefit to travel assignments is the opportunity to experience a community for a longer stretch of time and absorb the local culture. Week-long vacations never provide the intimate knowledge of an area that a three-month assignment does, and if a traveler enjoys the work at the facility and the community, there is often an opportunity to extend.
Additionally, if the traveler has a tax residence, he or she can continue to enjoy the benefits of tax-free travel reimbursements. As great as that sounds, the party cannot continue forever, as tax regulations prohibit a traveler from receiving tax-free housing or reimbursements for more than a year in one geographical area.
The One Year Rule
Tax-free travel benefits like provided housing, per diems, tax advantage programs and allowances are only available to those that are working away from their tax home temporarily. Temporary is defined as an assignment not to exceed 12 months in one metropolitan area. This was not the case prior to 1992. Prior to 1992 and the legislative provisions that changed the rule, temporary was defined as work away from home for less than 2 years, regardless of the location of the assignment. The focus shifted to the location rather than the length of transitory job sites.
Applied to travel nurses and other healthcare travelers
The One Year Rule has a broad application. Tax homes are defined as where an individual earns the majority of their income unless they fall under the exceptions for temporary assignments and the engagement does not exceed a year in one location. The 12-month measurement focuses on the continual income in the area to avoid creating a tax home at the temporary job site. Working on a different floor, with a different agency, a different facility across town or taking up another temporary residence within the same metropolitan area does not change the fact that the taxpayer is receiving a continual stream of income in the same area. Additionally, the fact that each contract is for a term less than twelve months, does not “restart the clock”. All assignment extensions in the same area are considered a continuation of the first.
The rationale that Congress had when establishing this benchmark is that it would be unreasonable to expect someone to move their residence to work only for a year. Even though one year may seem short term, a line had to be drawn to prevent abuse of the benefit.
Agency due diligence
A staffing agency is required to question a traveler about their work history to determine if there is a possibility that the one year rule will be broken during the engagement. In addition to the work history that a traveler submits to the agency, many Tax Home Declaration statements will contain a question about the traveler’s work history. Failing to review this could result in some harsh penalties assessed on the agency by the IRS in an audit.
“Orbiting”
Occasionally, a traveler works multiple contracts that orbit a particular area. For example, if a traveler works in Thousand Oaks, Calif., then Long Beach and Pomona, even though these towns may be construed as different areas, they are still considered the same tax base as one could live in the middle of the assignments and have a reasonable commute. Additionally, if a traveler continues to do this multiple years, the business necessity of maintaining a home in another part of the country ceases as it would be more reasonable for the taxpayer to move their residence closer to the long-term source of income since it was all earned in the same region.
After a year
Once the 12-month time is reached, all reimbursements are to be treated as taxable income subject to Social Security and Medicare taxes. This includes the fair market value of any housing provided by the agency. Just because the agency pays for the lodging, it is still a constructive receipt of income to the recipient/beneficiary as it is a substitute for wages.
What restarts the clock?
In our next article, we will explore the break-in-service rules and what is necessary to restart the clock.
About the author:
Joseph Smith is an IRS Enrolled Agent (EA) and former travel respiratory therapist whose firm, TravelTax, provides tax preparation and audit representation for the mobile professional.
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