NuNomad Location Independent Living, Lifestyle Design, Independent Travel

by Joseph Smith, EA

As you probably expect, the answer is “it depends.” While the tax code allows for potentially huge deductions for travel expenses, the rules in this area are specific and unfortunately confusing. Yes, we all wish our worldwide jaunts were deductible as business travel expenses, but there are only 3 situations in which this could commonly occur.

You are traveling away from your tax home

The most important concept to grasp here is that you must be away from your tax home which may or may not be your permanent residence. These are technically two distinct items, even though for most people it is the same location. A tax home is an item of economic substance- where you make the majority of your income and work the most. By contrast, a permanent residence is a question of legal substance- where is your car registered, your driver’s license and the place you get your mail. Just because one has significant legal ties to a location, it does not mean that their tax home is at the same location – and vice versa. For example, a professional sports player’s tax home is the team’s base of operations, not where the athlete lives. By allocating income based on physical presence, an athlete earns most of their income at the team’s city, making that their tax home. Money earned during road games is allocated to those locations, but is minor in comparison. Commuting from the athlete’s home (where their spouse and kids are) to the location of the games is a non-deductible personal expense, equivalent to a regular daily commute. As an interesting side note to this situation, if the team plays a road game in the home town of the athlete, those costs are deductible since they are away from the primary source of income (tax home) overnight earning their salary even though they are sleeping in their own bed.

What about real nomads that do not have a primary place of income or never work in the same place? For people that have multiple locations of income, the tax home will be based on the following factors: 1) whether the individual has income at the claimed home, 2) whether the individual has substantial and recurring expenses in keeping a home that they use as a residence and 3) whether the individual has abandoned the place they call home. An individual must satisfy two out of three of these factors to have a tax home. Many nomads do not have significant expenses maintaining a fixed, primary residence and neither do they earn income in the area of their home. That leaves one criterion and a tax home cannot rest on one out of three of the tests. For most nomads, this is the least feasible option.

Traveling to meet clients

For a nomad, the key issue with a tax home is that the question of where you earn your income is not about where the client is located -it is about where you are physically present while you earn the income. If you spend 12 months in Moscow and provide web services for a company in Brazil, your tax home is generally in Moscow. Additionally, since a tax home is an economic issue and not a legal one, the fact that the tax home is in Moscow does not necessarily affect issues of immigration and residence. That is a permanent residence issue. If your tax home is Moscow and you travel to meet a client in Iceland, then the costs to meet that client are deductible since you are away from your place of income – your tax home. The important aspect of this is that you must have a place that you are staying long enough to be a primary place of income. In our tax practice, we often have to determine the location of our client’s tax home based on where they have been and are planning to go in the future. For a nomad, this can change often.

Moving expenses

The most common way that a nomad can deduct travel expenses is by claiming them as moving expenses, however, not every relocation will qualify. To claim moving expenses as an employee, you are required to work at the new location for a period of nine out of twelve months after the move. For those that are self employed or own their own companies, the test is expanded to 18 out of 24 months in the area following the move. Traveling to meet clients and returning home still satisfies the time requirement. The point is that you establish a residence vs. a temporary sojourn. There are a few exceptions to this, but they involve involuntary events, not personal preference.

There are a few other rare situations that would allow you to deduct your travel costs but they are beyond the scope of this article. Not every nomad has the same goals, so reviewing your particular circumstances with a tax professional that understands this area of the tax code will not only give you clarity but also help avoid a nasty audit.

Joseph Smith is an Enrolled Agent who operates one of the very few tax preparation services for the mobile professional within the USA and Canada. Vist Travel Tax for more information.