Where Oh Where Is My Tax Home?
As if figuring out our taxes weren't already difficult enough, the powers that be at the IRS and from various state agencies have made things even more complicated by agreeing to disagree on what the definition of a tax home is. From the IRS' perspective, your tax home is determined by the location of your work; by where you provide a service. If your employer is based in Kansas but you are working in Kandahar, the feds classify the money that you earn as Foreign Earned Income. By contrast, in almost all states throughout the country, your tax home is defined by where you live and sleep on a regular basis. Your tax home is your "abode" or "domicile".
Living Outside the U.S.?
If you are a U.S. taxpayer who is living and working abroad, then the federal government identifies your foreign address as your tax home - there is no requirement that you have a U.S. tax home or select a state in which you live. However, things can get much more complicated if you have a mailing address within their borders, even if the address is simply being used for IRS correspondence or forwarding mail, or as a place holder for U.S. citizens living outside of the country to be able to vote in federal elections. Several states, including Illinois, New York, California and North Carolina are determined to collect state income taxes from everybody that has an address within their state, and frequently send correspondence to these addresses demanding that state tax returns be submitted.
American citizens who live and work abroad and maintain these U.S. addresses for mailing refunds and other IRS correspondence or for forwarding or prioritizing mail have been able to establish that they do not have a tax home for U.S. state purposes, but this determination has to be made on an individual basis based upon the "facts and circumstances." It is suggested that if your are not actually residing in a state but are using an address within the state for your federal tax return, you submit a non-resident return.
State Tax Home on HMA
There are many instances where an American taxpayer works abroad for a period of years but is required to return to the U.S. for periods of less than a year. Though this is an extended period of time, it is not long enough to qualify as having established a tax home. As long as their intent when they came to the U.S. was to return to their overseas home where they kept their belongings.
Therefore, the address within the United States that they are using as their base of operations does not count as a state residency. It is advised that a detailed schedule be kept of when and where the taxpayer resided while in the country in order to provide documentation where needed. Every state and case is unique and is heavily fact dependent.
Student Tax Home
Students who leave their home state in order to attend college continue to qualify as residents of the state where their parents live, even if they work and earn income in another state while they're at school. If this is the case, the income that they earn at school is considered non-resident income in the state where they're studying and is also reported as resident income in their tax home. In most cases the taxes that are paid on non-resident income may be taken as a credit on your state income tax return.
Determining your tax home can be a complex and potentially costly calculation. It is recommended you seek expert assistance to navigate through the maze of laws and regulations.