Travel Nursing Pay – Qualifying for Tax-Free Stipends: Part 3: The 3 Factor Threshold Test

Now that we have made the distinction between indefinite work and temporary work, and we have discussed how to maintain temporary status as a travel nurse, we can move on to our discussion about how to maintain a legitimate tax home. Again, the three factor threshold test is going to be in play for the vast majority of travel nurses because they don’t have a permanent job back at home from which they derive a significant percentage of their income. In this blog post, we’ll begin our detailed discussion of the 3 factor threshold test, paying particular attention to the circumstances faced by travel nurses.

Remember, the 3 factors in the threshold test are as follows:

1. Whether the taxpayer performs a portion of their business within the vicinity of the declared tax home and uses the declared tax home for lodging purposes while performing business there.
2. Whether the taxpayer’s living expenses are duplicated as a result of their traveling for work.
3. Whether the taxpayer has not abandoned the declared tax home. This is typically determined by how frequently the taxpayer uses the declared tax home for their own personal lodging and personal business, and whether or not the taxpayer has direct family members living in the declared tax home (Blum and Coppage).

If you’re going to be working temporary travel nursing jobs, in order to guarantee your ability to qualify for tax free stipends you must meet all three criteria. If you meet one, or none, then you are an itinerant worker and do not qualify to receive tax free stipends.

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If you meet two of the criteria, then you move into the more subjective facts and circumstances test. This basically means that the IRS and/or courts will make a judgment call as to whether or not the facts of your specific circumstances qualify for receiving tax free stipends.

It’s very important to understand how the IRS makes this determination because the vast majority of travel nurses fall in to this category. Among the three factors, there are only three combinations of 2 that are possible, 1 and 2, 2 and 3, and 1 and 3. We are first going to discuss what it takes to meet factors 2 and 3. This is because the methods for meeting factors 2 and 3 have been made very clear. Meeting factor 1 is a bit more subjective so we’ll tackle it last.

Factor 2: Duplicative Expenses

The second criteria in the 3 factor threshold test to determine a tax home is that the taxpayer must incur duplicated living expenses. This criterion is relatively straightforward, but it does not involve a specific dollar amount. However, IRS and Revenue Court rulings indicate that the amount is substantial and real. For example, in the case of rent, the amount must be fair market value to qualify. This value is easily discerned from local advertisements for housing and apartment rentals. I have had many conversations with travel nurses, and read many blog posts or chat room posts in which a creative plan was set forth to somehow circumvent the substantial expense requirement, yet still meet the overall requirement. I strongly recommend against this and urge you to consider the following examples.

There once was a taxpayer who spent most of his time in 1990 traveling about the country while working for Walt Disney’s World of Ice. The taxpayer used his parent’s home in Boise, Idaho as his tax home. He stayed there between shows, contributed time and labor to the maintenance of the home, maintained his driver’s license with the home’s address, kept his possessions there, and paid Idaho state taxes. The court ruled that he could not use his parent’s home as his tax home. In doing so, the court ruled that the taxpayer’s reason for staying there was personal rather than business related and that while his expenses on the road were more expensive, they were not duplicative (Blum and Coppage).

In another court case, two brothers worked for a pipeline company that sent them to complete short term projects at various locations throughout the country. The brothers owned an ancestral home in Vallejo, California and returned there from time to time between projects. They also had a disabled sister who lived in the home on a permanent basis. One of the brothers paid for his living expenses while residing in the home and the other pitched in for bills and even paid the property taxes on occasion. The court ruled that the expenses were financial support for the sister rather than maintenance costs for the home. As a result, they were unable to declare the home as a tax home and therefore did not qualify to receive tax free stipends.

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I strongly advise that you seek the advice of a tax adviser who has experience specifically with travel nurses and other temporary workers if you wish to do anything other than pay your own mortgage or rent a property for which you hold the lease. I have had conversations, and read blog posts, in which people claim that a travel nurse can pay rent for a room in a family member’s or friend’s home and declare it as their tax home. This may be true, but it’s more complicated than simply paying the person rent. The rental payments may have to be declared on the person’s taxes as income. Some travel nurses also choose to rent out their declared tax home while they’re working their travel nursing jobs. Again, this may cause complications that prevent the travel nurse from satisfying factor 2. A tax adviser experienced with these issues can help you work out the details.

Factor 3: Maintaining Personal and Personal Business Ties

The third factor in the 3 factor threshold test to determine a tax home is that the taxpayer must not have abandoned the declared tax home which is typically determined by how frequently the taxpayer uses the declared tax home for their own personal lodging and personal business, and whether or not the taxpayer has direct family members living in the declared tax home. The thrust of this test is to determine the strength of the ties that the taxpayer has to the declared tax home.

Family ties and your use of the property are certainly important, but there are many other variables that are considered. In fact, this is the factor for which your personal business ties come in to play. There is no magic number or combination of personal variables that will ensure your qualification for factor 3. You should really seek to ensure that all variables are met. Below is a list of personal business variables and pertinent insights for your consideration.

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Maintaining Personal Ties and Personal Business in Your Declared Tax Home:

1. Use it for lodging: You can return home between assignments, on holidays, and any other time you’re able.
2. Maintain one permanent address at your tax home: You should use one address for all official documents and all mailing purposes. Get a P.O. Box that offers mail forwarding services and use it for everything. As far as I’m concerned, don’t use your assignment addresses for anything.
3. One Bank Account: Be sure that your one bank account was opened at a branch in your tax home. Use it for everything. It’s best to use a national bank with branches throughout the nation, or at least in the locations you’ll be traveling. Trust me nobody likes local credit unions more than me, but they’re rarely suited to meet the demands of a constant traveler.
4. File your taxes as a nonresident in assignment states: Do not file as a resident, or part time resident, because you’re neither one.
5. Keep your driver’s license registered at your tax home: Do not get a new diver’s license.
6. Register to vote at your tax home: No matter what the circumstances, do not register to vote anywhere else other than your tax home. And if you’re not registered to vote, you should be.
7. Make sure that all financial services you utilize have your tax home address: This goes for automobile insurance, health insurance, 401K, and any other type of financial service you utilize.
8. Maintain a primary doctor and dentist at your tax home: I understand you may need to get healthcare on the road, but you should always see your primary care providers for routine services and as much as possible otherwise.
9. Volunteer and civic activities: If you currently participate in such activities, continue to do so or try to maintain the connection. If you don’t participate in these activities, it may be a good time to look in to it.
10. Register all vehicles in your tax home state: Despite that fact that you’re traveling, you should register all vehicles you own in your tax home state and keep them registered there.

If you’re going to satisfy factor 2, then it makes perfectly good sense to also satisfy factor 3. This is because meeting factor 1 is more subjective and more of a hassle than meeting factor 3.

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Now, it’s been my experience that most travel nurses would like to avoid satisfying factor 2. That is, they’d prefer not to have duplicative expenses. This has become more and more common as the economic circumstances and proliferation of Vendor Management Services have put downward pressure on bill rates making travel nursing jobs less lucrative. The only combination of factors that would allow this to happen is 1 and 3, conducting business at the declared tax home and not abandoning it. We’ll discuss qualifying for factor 1 in our next blog post.

It’s important to note that we are not tax advisers, Certified Public Accountants, or Lawyers. We are not in any way providing any tax advice. All information regarding taxes is informational and intended as a jumping off point. You must seek the help of professional tax advisers to gain a clear understanding of your unique circumstances. We recommend the folks at traveltax.com.