First, note that whether a job is temporary (and thus the expenses deductible or the reimbursement excludeable) or whether it is indefinite (and thus not deductible and any reimbursement included in your income) depends on all the facts and circumstances. However, in general if you know the job won't last more than a year when the assignment starts, it is temporary. This is true even though you are not sure whether it will last, say, 6 months or 8 months. See the discussion in Publication 463 for a little more on this, though even that discussion is not terribly complete.
LegalSecy:So ... how does his employer (and the client)
know how much taxes we will have to pay on
that "extra income" that he's getting taxed
on?
In general, employer's who do this don't know for sure what the exact amount of additional tax is that you pay on the reimbursement. Instead, they estimate based on what they do know—what they are paying the employee and what is on the employee's W-4. Some employers will ask for return information to get it exactly right, but in my experience those are the minority of firms.
Note, too, that what they pay your husband to cover the tax from the reimbursement is itself also taxable income. There is a formula that sophisticated employers use to figure out how much must be paid to cover all the tax on the reimbursement and all the tax on the reimbursements, too. It is not a simple computation to do by hand, but with a computer or programmable calculator it is easy to do. The employer will, of course, have to do the proper withholding for tax on all this as well, so there should be extra withholding there to help pay the tax on all this.
LegalSecy: I am worried that somehow we are going to end
up with a giant tax bill that we can't
afford.
You have a pretty good idea of what the reimbursements have been running, right? So, use a tax program and figure your projected tax for the end of the year without the reimbursements included and then simply change the salary figure you put into the program to add in the reimbursements your husband gets. That difference will be the tax effect of the reimbursements, and will give you an idea of whether you might be short or not on withholding for this. That won't be entirely accurate, since his employer is going to give him even more money to pay the tax, and that too is taxable income. But again, there should be withholding on that, too. If his withholding from the salary and travel reimbursements is enough to cover the tax on those, then the withholding on the amount the employer pays to reimburse your husband for the extra tax that this causes the withholding on that should cover it. In short, I am suggesting a way for you to estimate if you need more withholding so you can get that started now. If this all sounds too complex, see a CPA or other tax professional for assistance in figuring out where you stand so that you won't be woefully short come next April.
LegalSecy: I don't understand why the IRS says that my
husband is supposed to move to another state
1000 miles away when we are not separated or
divorced, that's just where his employer
assigned him to work 4 days/week. But I still
work F/T where we live, so I couldn't move to
the state where he is working if he had to
move.
Of course, the IRS doesn't say anything about where your husband is supposed to move for his work, or where you should work. Your husband's employer determined he should work in a location 1000 miles away, and your employer has you working where you presently live. That arrangement was your choice; the tax law simply tells you what the tax consequence of that choice is. The IRS didn't make this up on its own; it is applying the rules in the tax code, the treasury regulations, and the related case law.
LegalSecy: Is this a new law, or has it been like this
for a long time, and what is the reasoning on
this?
This is not new; the basic rules have been essentially the same for decades. The IRS used to use a 2 year rule for determining whether an assignment was temporary under a Revenue Ruling it issued back in 1983. The Congress changed that to the one year rule in 1992 when it amended IRC § 162. The IRS then issued Rev. Rul. 93-86 in the following year to summarize the current state of the law. The discussion in that ruling is still basicallly what applies today.
The reasoning for it is pretty basic. Personal living expenses are not, for the most part, deductible. That's why what you pay for your home (other than mortgage interest), food, clothing, etc., are not deductible. Nor are commuting expenses deductible because they are also personal living expenses; doesn't matter how long hte commute is. The rule for the tax home is meant to put everyone on an equal footing here by treating the area where you work as your "home" for detemining what is deductible.
And example is perhaps the best way to see it. Let's suppose that Amy has a job with Corporation X in Denver and lives in Denver. She lives in an apartment in Denver and drives 15 miles each way to her office. Her daily commute to her office is not deductible, nor is her rent for her apartment nor the food she buys. Amy has a boyfriend in Utah and often goes out there on weekends to visit him. Her travel costs to and from Utah are also not deductible.
Brenda lives in Salt Lake City and is assigned for a one year period to work in Corporation X's office in Denver. It's not clear where she will be assigned when that year is over. She goes to Denver and gets an apartment there, also about 15 miles from the Corporation X office, to live in while she is there for a year. However, she keeps her house in Salt Lake City so she can go back there to visit her boyfriend every weekend. He has a job there and doesn't want to move to Denver to be with Brenda.
Should Brenda get tax deductions for her travel to and from Utah to see her boyfriend, get deductions for her rent and food, and other costs in Denver, just because she decided to keep the home in Utah and not move everything out to Denver? If Brenda got those deductions, that's unfair to Amy, who is in basically the same situation as Brenda for that year, but who cannot deduct any of those things. The law gives deductions for temporary assignments away from the permanent tax home because for short assignments it doesn't make sense to move your home, and the employee incurs additional costs that would not have been incurred if the work were still at the tax home. But there needs to be some rule that cuts off what is temporary and what is permanent. Congress decided in 1992 that the rule would be 1 year. That period was thought long enough that employees would ordinarily move to the area of the job rather than traveling between the two.
