I am a federal government employee. When we go on business trips overseas, the government pays us in advance per diem (for lodging, meals, and incidentals) at the standard government rates. However, frequently we are able to find cheaper options and do not spend all of the per diem. While the finance office conducts a close-out meeting with us after the trips to make sure that all of the our expenses were filed, they never ask if we use all of the per diem. The standard practice is to just pocket the unused per diem and, from everyone I talk to, to not report it on taxes. But this doesn't seem right to me. It seems like I should have to report the unused per diem as income somewhere on my federal and state tax returns. I have searched for guidance on this issue online to no avail. Can you provide some insight and direction on this matter?

Thanks!

Per diem payments for business trips are different than per diem payments for temporary work locations. Travel per diem is adjusted each year by the GSA to reflect average costs, and there will be times your costs will not meet that average.

Due to cost-benefit analysis, the IRS has determined it is not worth their effort to try to tax instances where per diem exceeds the actual expense incurred.

So, in short, the IRS does not tax unused per diem as long as the amount of per diem received did not exceed the federal rates?

Yes, that is correct. The IRS uses the federal rates as the guide to determine taxability.

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Originally Posted by AtlantaTaxExpert

Yes, that is correct. The IRS uses the federal rates as the guide to determine taxability.

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Thank you very much for your helpful insight. I just wanted to make sure I was reporting all my income properly. Thanks again!

Glad to help.