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kknnbb · Feb 16, 2011, 10:46 AM

Hi,
I am currently working in Massachusetts. My company is sending me to another location of our company in North Carolina for about 2-3 years. I guess this would be my "indefinite Work Assignment" cause it exceeds one year. I will be paid living allowance of 3000 dollars per month to live in North Carolina which will be taxable income.

The HR of my company says that the living allowance is based on the assumption that my tax home will remain Massachusetts. Therefore, I will have to have a lease or permanent residence in Massachusetts.

I tried to find any such requirement in tax laws on internet. I found that maintaining tax home in Massachusetts and couple of other requirements (like the assignment should be "temporary" i.e. less than 1 year and maintaining ties with tax home etc.) are required only when I want to make travel and lodging expenses deductible. I do not and can not make these expenses deductible as the assignment is "Indefinite". I did not find any single sentence regarding maintaining tax home at the original place of work when I am not making travel expenses deductible. I will be getting 3000 extra as living allowance and I will be paying tax on all of it.

Does anybody know why I still need to maintain my lease in Massachusetts. Or do I really have to maintain it? Any link to tax code section would be helpful. Why would IRS care if I am paying tax on all of it and not taking any deduction for any expense?

Any help is appreciated.
Thank you.

ebaines · Feb 16, 2011, 11:18 AM

It's not an IRS issue at all - it's your company's policy that is the issue. If the living allowance is taxable then the IRS doesn't care what the reason for the payment is - they just consider it to be part of your wages. I suspect the issue here is that your employer doesn't want to give you a $3K raise, but is willing to help you defray legitimate expenses you incur by taking the assignment. But if you don't actually have a 2nd home to maintain why should they pay you extra? In the company's eyes you don't need this $3K/month unless you are incurring expenses for maintaining two homes.

kknnbb · Feb 16, 2011, 12:09 PM

Thanks ebaines for your helpful reply. Just one more clarification. I was wondering that the company might be getting any tax benefit by paying living expenses to an employee which could be done only when the employee has two homes. Is there any chance that the company is asking me to have two homes so that they can get the tax benefit (if any) on living allowance.

Thank you.

ebaines · Feb 16, 2011, 12:24 PM

Originally Posted by kknnbb

Is there any chance that the company is asking me to have two homes so that they can get the tax benefit (if any) on living allowance.

I don't think that's what's behind it. Paying you a per diem is a business expense, so the company deducts the expense from their corprate taxes just like any other business costs such as wages or travel and living expenses. There is no special tax credit for paying per diems to employees who happen to maintain two homes.

kknnbb · Feb 16, 2011, 03:24 PM

Thanks again. My company's HR told me that one time IRS did the audit of company and caught couple of people who were getting living allowance but did not have dual residency proof. I am guessing those people must be getting non-taxable living allowance and that's why they were asked to show ties with the tax home. I think company might have their own internal audit to check why company is paying some people living allowance and that's when I might be asked to show dual residency proof. If I am unable to do that; they will ask me to relocate permanently to new place of work and stop getting living allowance.
Do you think that IRS would ask for dual residency proof in an audit from everybody who is getting living allowance?

ebaines · Feb 16, 2011, 03:49 PM

If the company pays a tax-free per diem then yes, in an audit they could be required to show proof that (a) the assignment is temporary (intended to be less than 1 year in length) and (b) the assignment requires the employee staying overnight away from home. Obviously if the employee's home is actually located near the job site they would fail that second test. But in your case any such payment is not tax-free, so the IRS doesn't really care why the company pays it to you. Consequently in your case I don't see an IRS audit risk.