Your Tax Home: What the IRS Means by It, and Why It Decides the FEIE, Travel Deductions, and the Closer Connection Exception

The IRS uses three different concepts to describe where a person is: residence (the substantial presence and green card tests), domicile (the estate and gift tax concept of permanent home), and tax home (the general area of the main place of business or employment, regardless of where the family home is). Tax home is the one that decides whether an American abroad can claim the foreign earned income exclusion, whether a traveler's lodging and meals are deductible, and whether a Canadian who meets the substantial presence test can use the closer connection exception. It follows the work, and for a cross-border worker it can be in a different country from the family.

Key takeaways

• Definition: the tax home is the general area of the taxpayer's main place of business, employment, or post of duty, regardless of where the family home is. A person with no main place of business has a tax home at their regular place of abode. A person with neither is an itinerant whose tax home is wherever they work.
• FEIE: requires a tax home in a foreign country for the qualifying period; a US citizen whose abode remains in the US (family home, regular return) does not have a foreign tax home even while working abroad, and cannot claim the exclusion. The 2018 amendment clarified that the abode rule does not bar the exclusion for those serving in combat zones.
• Travel expenses: deductible only when away from the tax home overnight; a person who commutes across the border to a US job has a US tax home, and travel between home and work is not deductible. A temporary assignment (expected to last, and lasting, one year or less) does not shift the tax home; an indefinite one does.
• Closer connection exception: requires a tax home in a foreign country for the entire year; a Canadian who works in the US has a US tax home and cannot use the closer connection exception even with a Canadian family home.
• Not residence: a person can be a US resident under the substantial presence test with a foreign tax home, and a non-resident with a US tax home.

The definition

Revenue rulings and Publication 54 define the tax home as the regular or principal place of business. For an employee, it is the location of the job; for a self-employed person, the location of the business; for someone with several places of business, the main one, judged by time spent, income earned, and business activity. Where there is no principal place of business, the tax home is the regular place of abode, meaning the home. Where there is no regular place of abode either (a traveling salesperson with no fixed base), the person is itinerant and the tax home moves with them; such a person is never "away from home" and cannot deduct travel.

The family home is not the tax home if the work is elsewhere. A Toronto resident who works in Buffalo has a Buffalo tax home; a Seattle resident who works in Vancouver has a Vancouver tax home.

The FEIE

To claim the foreign earned income exclusion, a US citizen or resident alien must have a tax home in a foreign country throughout the qualifying period (the bona fide residence year or the 330-day period). The work abroad establishes it, but there is a further rule: a person whose abode is in the United States is not treated as having a foreign tax home. Abode means the family home and the place of return; a person who works abroad on rotation but keeps the family home in the US and returns there between rotations has a US abode and, under the IRS's view, no foreign tax home. Americans in Canada who have moved with their families have a Canadian abode and a Canadian tax home; the FEIE is available if they qualify under the residence or presence test.

Travel expenses

Ordinary and necessary travel expenses are deductible (for the self-employed on Schedule C; for employees not at all since 2018, except by employer reimbursement) only while traveling away from the tax home overnight. Commuting to the tax home is personal. A Windsor resident who drives to Detroit daily has a Detroit tax home; the drive is commuting. A Toronto consultant who flies to Chicago for a two-week engagement is away from her Toronto tax home; lodging and meals are deductible. A temporary assignment expected to last one year or less does not move the tax home; one expected to exceed a year, or that actually does, moves it to the new location from the start of the assignment (or from the date the expectation changed), and living expenses there become non-deductible.

The closer connection exception

A person who meets the substantial presence test can remain a non-resident by showing a tax home in a foreign country for the entire year and a closer connection to that country. The tax home requirement excludes anyone who works in the US: a Canadian snowbird (retired, no US business) has a Canadian tax home and can qualify; a Canadian who works in the US for a US employer has a US tax home and cannot, regardless of a Canadian family home and closer connection. That person's remaining route to non-resident treatment is the treaty tie-breaker, which uses the permanent home and centre of vital interests tests instead.

Cross-border patterns

Commuters. A Canadian commuting to a US job has a US tax home; excluded commuting days keep them under the substantial presence test; if the test is met, the closer connection exception is unavailable (US tax home) and the treaty tie-breaker applies.

Remote workers. A Canadian working from a Toronto home office for a US employer has a Toronto tax home (the work is performed there); the closer connection exception is available if the test is met through other visits.

Rotation workers. A Canadian on a Texas oilfield rotation with a family home in Calgary has a Texas tax home (main place of employment); the Calgary abode does not change that.

Americans in Canada. A US citizen who moved to Toronto with the family has a Toronto tax home and abode; the FEIE is available if the residence or presence test is met, though the foreign tax credit usually wins.

Dual assignments. A person with substantial work in both countries has a tax home at the main one; the secondary location's travel is deductible; the split follows time and income.

Worked example

A Toronto engineer takes an 18-month assignment at a Houston client site, keeps her Toronto condo and returns monthly, and spends 250 days a year in Houston.

• Tax home. Houston, from the start: the assignment exceeds one year, so it is indefinite; Houston is her main place of employment. Her Toronto condo is her abode but not her tax home.
• Travel. Houston lodging and meals are not deductible (she is at her tax home); trips to Toronto are personal.
• Substantial presence. 250 days; test met; US resident.
• Closer connection. Unavailable: her tax home is in the US.
• Treaty. Permanent home in both (Toronto condo; Houston apartment); centre of vital interests possibly Canada (family, ties) or the US (work); habitual abode Houston (250 days). Likely assigned to the US; section 250(5) deems her a Canadian non-resident; departure tax applies. Had the assignment been eleven months, her tax home would have stayed in Toronto, the Houston expenses would have been deductible against the employer's reimbursement, and the closer connection exception would have been available.

Official sources

"Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home." — Internal Revenue Service, Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, https://www.irs.gov/publications/p54

To claim the closer connection exception, you must have "Had a closer connection during the year to one foreign country in which you had a tax home than to the United States," claimed on Form 8840. — Internal Revenue Service, Closer Connection Exception to the Substantial Presence Test, https://www.irs.gov/individuals/international-taxpayers/closer-connection-exception-to-the-substantial-presence-test

Practitioner note

Tax home is the concept clients conflate with residence, and it is the one that quietly closes the closer connection exception for anyone working in the US. The rule of thumb: the tax home is where the job is, the abode is where the family is, and the treaty tie-breaker is what remains when the two disagree. For assignments, the one-year line is the whole analysis.

See also: Planning a move? Start with the Canada-to-US tax checklist and browse every corridor by city, province, and state.

Next step

Fairlight prepares the tax home determination, the FEIE and closer connection eligibility analysis, and the treaty tie-breaker where the tax home is in the US. See cross-border pricing or book a call.