Tax Planning: Travel While Away From Home on an Educational Fellowship

JC Leahy, MA Accounting
TaxHelpWhenYouNeedIt.com


Question from Janice in Chicago:

JC Leahy

JC, I read this is taxable, so my question is:  I am taking a post-doctoral Fellowship in Washington, DC that pays 94 K and an additional 12,000.00 for housing relocation for a 14 month period. The place I am thinking about renting is 1550 per month almost the same as my mortgage. (Yikes) Will I get a tax break by paying to live in both DC and Chicago? The rent in Dc is unbelievable! No longer will I be making 119/year

Answer:

Hi Janice! I tried calling your home phone but missed you, so here's your answer. Even though you view it as a scholarship, your fellowship, is (1) post-doctoral and (2) requires you to perform services. For both of these reasons, it, indeed, is taxable.

The next question is whether or not your out-of-town expenses are deductible.  Generally, if you are away from home for a temporary period of time on business, your expenses for travel meals and lodging are deductible. That is the general rule, but the details can be problematic. The key phrases are "away from home" and "temporary period."

Let's talk about the "away from home" part. To be away from home, you must have a home from which to be away. This is called your "tax home." If you don't have a "tax home" then your home is where you hang your hat.  In that event, the IRS views you as an itinerant.  Itinerants' travel expenses are not deductible. Your tax home is where you live on a permanent basis and either own or rent.  It must continue to be your home while you are away. For example, if you were a young person still living free-of-charge with your parents and you got a temporary out-of-town assignment, your parents' home would not qualify as your tax home because you would not have the burden of rent and other upkeep during your absence. Therefore, your travel expenses would not be deductible. For another example, suppose you owned your home and took a temporary out-of-town assignment and you decided to rent your home out during your absence. In this case, your house does not qualify as your tax home because you have rented it to be a home to someone else. In your case, you have a home in Chicago and I surmise that you are going to keep it there unrented, available to you while you are gone. So your situation in that regard is compatible with having deductible travel expenses.


The next key requirement is that you be away for a temporary assignment. This must be far enough from your tax home to require you to obtain lodging and sleep. Your 14-month assignment several hundred miles away from Chicago certainly meets that test. Your assignment must also be for a definite period. If the period is indefinite, it is not a temporary assignment for tax purposes. Your fellowship is for a definite period, which is good. However, the general rule is that a temporary travel assignment is not temporary if it lasts longer than a year. This seems like an arbitrary rule, but it is a rule, nevertheless.  If you could obtain a 12-month assignment, that would be great. If it must be for 14 months, just make sure that the 14-month limit is clearly stated in writing. Then I would recommend asking for an IRS determination

You are going to receive a separate housing relocation stipend as part of your 14-month compensation package. If your employer thinks this is a non taxable stipend, it will appear on your W-2 in box 12 with a code of "L". When taking deductions, you generally are not allowed to pay for a tax deduction with tax-free money. This would be a double tax break. Therefore, I believe that your travel costs, including meals, transport, and lodging, would only be deductible to the extent that they add up to more than your tax-free housing stipend. In other words, If you have $15,000 of travel costs and a $12,000 stipend, $3,000 is deductible. The stipend in this way would be counted like a reimbursement of travel expenses.

Some caveats: Meals cannot be extraordinary in amount. Also, if you decide to go back and visit Chicago (your tax home) every now and then during your temporary assignment, those costs are personal, not deductible. Finally, clarify with your temporary employer whether they will give you a W-2 or a 1099. I have known some educational institutions to issue 1099's. If you get a 1099, you will have to worry about paying self employment taxes.

I hope this helps, Janice! Let me know if there is anything else I can tell you!

JC Leahy, MA Accounting
TaxHelpWhenYouNeedIt.com (tm)
Tel.301-537-5365