Q. How do I file my state taxes if I work or live in a state that doesn't have an income tax?
A. If you're a travel nurse and you work in multiple states, you may find that filing your state tax returns is confusing. You may also be wondering if you could benefit from working or living in a state that doesn't have an income tax.
With rare exceptions, you'll file a tax return and pay taxes on income earned in each state. Your employer will withhold taxes and indicate the amounts on your W-2. If you're maintaining a tax home, you'll also file a tax return in your home state, reporting all income for the year, regardless of its source. Your home state will credit you for the taxes that you pay to other states so that you're not taxed twice. In effect, you'll pay the higher tax rate of the two states.
The following don't impose an income tax: Alaska, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington State, Wyoming, the Virgin Islands, and for nonresidents, the District of Columbia. But this doesn't change the rules noted above. A resident of these no-income-tax states (or other places) isn't exempt from paying tax to states where he works and, conversely, a resident of an income-tax state will pay home state tax on any income earned in no-tax states.
If you're a traveler, don't worry too much about state income taxes. Most state income taxes are only 3% to 6%. Because income taxes make up only part of the total state tax burden, you should also consider the effect on your bottom line of sales, property, and real estate taxes.
If you're a mobile professional doing some tax planning, you'd be wise to focus on federal taxes, which are as high as 25% of income. Minimizing your federal tax and maximizing your wage is the best approach in the long run.
Q. Can I get tax breaks for doing charitable work or making other contributions?
A. Nurses and other health care workers often contribute their time, working as relief volunteers, either here or abroad. When Hurricane Katrina hit the Gulf Coast, many hospitals gave their staff time off to help during the crisis. The tax code encourages this kind of activity, and most of your expenses are deductible.
If you want to contribute to a cause, make sure you contribute to a qualified charity (one that has tax-exempt status) even if you want to help a specific person. Because direct donations to an individual are rarely allowed, giving to the relief organization is the best plan.
If you're purchasing supplies or sending surplus equipment that you collect, the cost of procuring and shipping these items is deductible. Keep good documentation of who's receiving the supplies and an inventory list of donated items. Documenting more costly items by taking photos is a good idea.
If you donate your own time, the expenses of getting to the site, staying there, and returning are usually deductible. Again, be sure to document the beneficiary and the agency for which you're volunteering. If you use your personal vehicle, check the special standard mileage allowance the IRS allows for charity. Document the cost of meals and other expenses and keep a log or diary of your activities.
Your activity can't be primarily for pleasure or any personal gain. Sightseeing trips should be limited to weekends or after hours. The IRS doesn't consider weekends to be business or work days for the purpose of deducting travel expenses. That's why many conventions start or end on Mondays or Fridays, to let attendees enjoy the city where the convention is held and still maintain their tax deduction. If you have a lot of personal activity on the trip, you have to prorate the cost of the trip. You'll need to consider other rules as well. For more information, refer to IRS Publication 526 found at http://www.irs.gov.
Q. Exactly what is a tax home and do I need one?
A. Some great benefits of travel assignments are tax-free housing, travel reimbursements, and possibly meal allowances. These benefits come with the job because as a traveler, you have an official "tax home"-the place you travel from.
The first thing to understand about a tax home is that it may not be the same thing as a permanent residence. A permanent residence is the town you consider home and periodically return to between assignments, staying with relatives or perhaps renting a new apartment each time you return. A tax home goes a step further: It's where you maintain a livable residence. This can be a house, apartment, or a rented room, but you need to keep evidence of the regular expenses you incur in maintaining the property or arrangement.
Confusion about the distinction between a tax home and a permanent residence often leads to these common mistakes:
1. Claiming a relative's address (such as your parents' home) as a tax home-without any significant contribution to the dwelling's care and maintenance. While sending money for utilities might be a good way to reimburse a relative who's forwarding your mail, the amount is too varied to serve as proof of a tax home. Unless you can provide evidence of a rental arrangement where funds are exchanged-and the person you pay claims the income on his tax return-this doesn't qualify as a tax home. If the IRS asked you for proof of your tax home, you'd have to produce such evidence as rental contracts, payment records, cancelled checks, and tax returns, or the IRS will deny any travel deductions you'd claimed on a return. And no, rental arrangements with a relative or friend at a token amount won't qualify. A good way to determine a fair rental value is by checking the local classified ads for similar offerings in your area.
2. Completely renting your home or subletting your apartment. If you want to rent your home or apartment while you're away on assignment, make it a shared deal. Maintain a portion of the dwelling for yourself, storing your personal belongings and living there when off assignment. Otherwise, the residence is forfeited because another person is contractually occupying it.
These rules may be overwhelming for some travelers. A tax home can be worth up to $6,000 a year in tax savings, but the extra time and expenses to justify it may not be worth it. If you don't want to live your whole life around a tax deduction, you have alternatives. For example, many travelers have shed themselves of this burden and become what the IRS calls "itinerant" workers, whose tax home follows them wherever they go. Housing and travel reimbursements are treated as taxable income and the meal deductions are forfeited, but they're free to live wherever they please.
Other factors are involved in a tax home, but these are the basic rules you need to understand. Just be aware that when you sign a permanent residence form from a travel company, the assumption will be that you understand tax laws. Travel companies aren't in the business of policing their employee's tax home, so traveler beware!!
Source: Joseph Smith, EA, RRT, http://www.traveltax.com.
NOTE: To get advice about your specific situation, be sure to consult your tax advisor.