Many expatriates wonder what types of travel expenses are deductible on their US expatriate tax return. This is a fair question to ask considering the expenses that come with overseas relocation, work-related travel abroad, and the comparatively high expense of international travel (as opposed to similar travel within the United States). We explain what travel expenses you can deduct on your expatriate tax return as well as how to report these deductions when submitting your return to the IRS.
Deductible Travel Expenses
First of all, it’s important to identify what expenses qualify as travel expenses. To qualify as a travel expense, an expense must be directly related to work or the operation of your business and require that you are away from your tax home for a period of time longer than an ordinary day’s work. Note that to be tax deductible for an employee, these travel expenses must exceed travel expense reimbursements received from an employer.
To determine what qualifies as a deductible travel expense, you must determine where you call your tax home. If you are living and working in Bangkok, paying Thai taxes and filing your US expatriate tax return from Thailand, you would only be able to deduct travel expenses that are required for work outside of Bangkok. Travel expenses related to a client meeting in Hong Kong would be deductible, but the same would not be true if you stay at a hotel in Bangkok close to a place of business for convenience reasons.
If you conduct work in two locations, your tax home and place of business is generally where you spend more time, though some argue that it is where the majority of the revenue comes from.
Now that you know what qualifies as a travel expense, you can determine what specific travel expenses can be deducted on your expatriate tax return. Deductible travel expenses as listed on the IRS website are:
- Travel by airplane, train, bus or car
- Using your car at a business destination
- Fares for taxis or other types of transportation between the airport or train station and your hotel, the hotel and the work location, from one customer to another, or one place of business to another
- Meals and lodging necessary for you to conduct work
- Tips you pay for services related to any of these exemptions
- Dry cleaning and laundry
- Business calls while on your business trip, including fax or other communication devices
- Similar ordinary and necessary expenses directly related to business travel
Travel Expenses for Overseas Assignments
Many expats are overseas for assignments from a US entity and feel that their travel expenses while living and working overseas should be tax deductible. This is generally true, although it does depend on the intended duration of your contract.
If you are on an assignment that is expected to last more than one year, you are not eligible to deduct travel expenses because you would essentially be living overseas. If you are on an assignment that was supposed to last for one year and you end up wrapping up the assignment early, no expenses are deductible as travel expenses since the intention was to stay for more than a year. Similarly, if you are on an overseas assignment and the duration of the assignment ends up going over one year, travel expenses are only deductible up until the expected duration changes and the assignment is expected to run longer than one year.
Another popular deduction is expenses related to finding a job overseas or back home. If you are looking for a new job in the same trade or business you presently work in, travel expenses are deductible. However, if you are not looking in the same industry or are looking for employment for the first time, these expenses are not deductible. The same is true if there is a substantial break in time between the end of your previous work and the beginning of your new employment.
It is important to remember the limitations on deductible travel expenses. Travel expenses are limited to 2% of your total adjusted gross income. For more information on the 2% limit, refer to Topic 508 at IRS.gov.
Reporting Travel Expenses
Now that you have determined what travel expenses are eligible for deduction, it is important to understand how to report these expenses.
As an employee, unreimbursed and allowable travel expenses (as determined from above) are figured on Form 2106 or Form 2106-EZ. These expenses are then carried forward to Form 1040 via Schedule A. Unlike other deductions, travel expenses must be itemized in order to be deducted, and thus are reported via Schedule A on an expatriate tax return.
If you are self-employed, your reporting requirements are slightly different. Travel expenses for the self-employed expat should be reported on Schedule C on an expatriate tax return, or Schedule C-EZ as an alternative. These schedules then must be attached to Form 1040 as part of your expatriate tax return.
Now that you know what travel expenses are eligible to be deducted on your US expatriate tax return and how to report them, you must be aware of how important recordkeeping is for these deductions. Keeping accurate records is essential when it comes to filling out the necessary paperwork to deduct these travel expenses with Form 2106 and Schedule A. It is also important to have these records available in the event of an audit. Many tax experts say that deducting travel expenses on an expatriate tax return is a good way to raise a red flag at the IRS, making accurate recordkeeping that much more important.
Questions About Your Expatriate Tax Return?
On the point above, it might be worth checking out our post on making sure you file your tax return correctly. If you have any questions about deducting travel expenses on your expatriate tax return, or if you would like to learn about our expat tax services, please contact us.