[Update: Starting in 2018, this deduction is no longer possible since umreimbursed employee expenses are no longer deductible since the TCJA was passed.]
Many physicians in training go away from their main site for a period of time. This may be a month, a few months, or even an entire year. Most of them aren't aware that nearly everything they spend on that trip may be tax-deductible. While residents/fellows might not be paying that much in tax anyway, every little bit of savings helps even more when you have a relatively low income. Here is how it works, straight from the IRS:
You can deduct travel expenses paid or incurred in connection with a temporary work assignment away from home. However, you cannot deduct travel expenses paid in connection with an indefinite work assignment. Any work assignment in excess of one year is considered indefinite. Also, you may not deduct travel expenses at a work location if you realistically expect that you will work there for more than one year, whether or not you actually work there that long. If you realistically expect to work at a temporary location for one year or less, and the expectation changes so that at some point you realistically expect to work there for more than one year, travel expenses become nondeductible when your expectation changes.
- Temporary work assignment. Check.
- Different from your main place of business. Check.
- Away from home. Check
- Less than one year. Check
- No expectation of working in new location for more than one year. Check.
[Update: Be sure to read the comments section for a discussion of whether a one-year fellowship or rotating internship where your employer is in the new city should really be considered a “temporary work assignment.”]
What Is Deductible?
Here's what the IRS says:
Deductible travel expenses while away from home include, but are not limited to the costs of:
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Travel by airplane, train, bus or car between your home and your business destination. (If you are provided with a ticket or you are riding free as a result of a frequent traveler or similar program, your cost is zero.)
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Using your car while at your business destination. You can deduct actual expenses or the standard mileage rate, as well as business-related tolls and parking fees. If you rent a car, you can deduct only the business-use portion for the expenses.
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Fares for taxis or other types of transportation between the airport or train station and your hotel, the hotel and the work location, and from one customer to another, or from one place of business to another.
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Meals and lodging.
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Tips you pay for services related to any of these expenses.
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Dry cleaning and laundry.
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Business calls while on your business trip (This includes business communications by fax machine or other communication devices).
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Other similar ordinary and necessary expenses related to your business travel (These expenses might include transportation to and from a business meal, public stenographer's fees, computer rental fees, and operating and maintaining a house trailer).
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Shipping of baggage, and sample or display material between your regular and temporary work locations.
Did you get all that? It's almost everything you spend. The airfare or mileage (57.5 cents a mile) to get there. The mileage while you're there. The rent you pay. The utilities you pay. Taxi or subway fare. Tolls. Parking fees. Even all the food you eat. Actually, you can only deduct 50% of the cost of meals. But the easiest way to calculate that is to use the standard IRS per diem ($71 a day in New York City.) So, if you're in NYC for a one year fellowship, that $71*50%*365 = a $12,957 deduction. The best part about it is you may be eating at the hospital or fixing peanut butter and jelly at home. Perhaps you only spent $3K on food that year. You still get the $13K deduction if you use the per diem method.
Since your fellowship is likely July to July, you use half of your deductions in one year and half in the next. Since you're not living at home, even the distance you drive from your apartment to the hospital is deductible. A 10 mile commute, each way, 6 days a week for 50 weeks is worth a $3,450 deduction. The rent you pay? Completely deductible. A cheap rental in NYC might be $2000 a month. $24,000 deduction.
Basically, if you're doing a fellowship or rotation in another location, you may be able to dramatically lower your tax bill.
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Where Do You Take The Deduction?
Since you are an employee, you can't just take this deduction on Schedule C. These are basically unreimbursed employee expenses, so they go on Form 2106 and are then transferred on to Schedule A, line 21. The first 2% of your AGI is not deductible. But that's probably only ~$1,000 and we're talking about $20-30K in deductions. You do have to itemize of course.
Remember They're UNREIMBURSED Expenses
If your fellowship program is paying for the apartment or plane ticket, you can't claim it as an umreimbursed expense. The reason is that your employer is claiming it as a deduction, and you can't both have it.
Fellowships or rotations in another city or state can be a great educational experience. They can also represent significant additional expense. But at least those expenses are deductible!
What do you think? Have you taken this deduction for a required or optional rotation? How much did you save off your taxes? Comment below!
Awesome post. 3 questions though.
If I did a rotation out of state, do my miles need to be recorded before and after? I did a rotation a few months ago and don’t have mileage recorded but can just figure it out. Would that still count on my taxes next year?
The post is titled “out of state”…
If I had an extra rotation somewhere else from my normal place but in the same state, do I get he deduction for mileage?
Does there need to be receipts for the food or I can just take the “per-diem” method that you talk about? Sorry, I’m retroactively asking these questions because I didn’t even think about this before.
I am very concerned about misinterpretation of this post. I do not see how most individuals would be able to qualify for this deduction during their fellowship. (On the other hand, rotations within a rotation or fellowship that require you to travel outside of your geographical area would, of course, allow you to use all those deductions as long you were the one paying for the expense.)
The IRS allows the travel expenses outlined in the post to be deducted when “Your duties require you to be away from the general area of your tax home (defined later) substantially longer than an ordinary day’s work.”
Furthermore, tax home is defined as follows: “Generally, your tax home is your regular place of business or post of duty, regardless of where you maintain your family home. It includes the entire city or general area in which your business or work is located.”
So, during your one year fellowship, you are an employee of your new institution and that is your new regular place of business. You can not deduct all your living expenses as an employee for a job just because that job is not expected to last longer than a year.
Of course, this is the tax code, so, it is more complicated than this. And, therefore, there are circumstances where I can see fellowship expenses being deductible. But, in the most straight forward case, an individual finishes the residency in city A with institution A and calls up a moving company to move them to city B for a fellowship with institution B. The individual’s tax home has also moved from city A to city B and living expenses during the the fellowship are not going to be deductible.
I am not an expert with respect to tax code or anything of that nature. I was thinking something along these lines, but slightly different: If a person has a one-year fellowship, then that person most likely has a year of the clinical fellowship and a paid orientation period that immediately precedes the fellowship. This means that the one-year fellowship position is greater than one year for tax purposes.
It looks like we agree that going off to do a rotation in another city for a month or a few months is legit, no? Your disagreement is that if you’re away for a year and you receive your paychecks from a new institution in that new city then that should NOT be considered a temporary work assignment.
I guess it really comes down to how you view the fellowship. Is it temporary time away from your regular place of business or not? Is this a gray area-i.e. a good place to be aggressive, or is it black and white? If you view it as gray, then 2 out of 3 outcomes are good:
Outcome # 1: The IRS never audits you. Good.
Outcome # 2: The IRS audits you and you pass the audit, or you go to tax court and get at least some of the deduction you claim. Good.
Outcome # 3: The IRS audits you, you fail the audit and go to tax court and the entire deduction is disallowed by the judge. Bad.
Can anyone point to a Tax Court decision showing a fellow who took this deduction lost it all? If not, this looks pretty gray to me for a fellow, and it’s clearly allowed for out of area rotations in residency or fellowship.
I would think that a fellowship at an institution is going to be considered a new tax home for the vast majority of physicians in training. You are correct regarding away rotations as long as they are not reimbursed.
I would not push this as a standard practice for most young physicians.
I agree it doesn’t fit most fellowships, if for no other reason that most are 2-3 years! The rotation lasting a few months is an easy target, of course, and the one year fellowship is a fairly gray area- read the rules and see if you think you qualify.
So I own a home during dental school. I’m planning on doing a 1 year General Practice Residency and then either working or going on to more training. Does that count if I go somewhere outside my current metro area?
Thanks for posting this! Wish I would’ve known about it for my fellowship!
I wonder if this could also be used for a one year internship that is at a different location than your residency. For example, a IM prelim year before radiology. The problem is that you are going from school to job to a different job. Has anyone done this?
This post should be required reading for EVERY 4th year med student and every resident everywhere. I could have easily saved 5 grand (likely more) my transitional year!(don’t forget about the fact that many of us do a 1 year internship in one place and then move on for residency).
I feel dumb now.
Thanks,
I am just a doctor and an big fan of this blog but, respectfully, I think this post is a HUGE misinterpretation of the IRS guidelines.
Katietsu is 100% right: “So, during your one year fellowship, you are an employee of your new institution and that is your new regular place of business. You can not deduct all your living expenses as an employee for a job just because that job is not expected to last longer than a year.”
The only place where I see it applied is for residents/fellows who need to go to another city for some of their rotations. Those rotations should qualify for the tax deduction.
The point of this deduction is that the individual is reimbursed for her expenses while being away from her usual area of business/living. Please read the IRS guidelines: http://www.irs.gov/taxtopics/tc511.html .
But this is the case with fellowships, I recall even thinking about using another part of the tax code that seemed to fit but cant recall rn. A fellowship is not required, does contribute to your skills, etc…and is easily and usually not where you plan on being or thought of in that way. It logically applies, just because the whole idea is ridiculous doesnt mean it would work and be totally in line.
From the horse’s mouth:
“In determining your main place of business, take into account the length of time you normally need to spend at each location for business purposes, the degree of business activity in each area, and the relative significance of the financial return from each area. However, the most important consideration is the length of time you spend at each location.”
Unless one owns or rents a residence in a different state at the same time (and most fellows do not), it would be difficult to demonstrate that one’s main place of business is not where one’s current job is.
I agree. If someone wanted to do this for a year long fellowship, they would need to maintain their home in the old location. It would be a tough argument with the auditor without doing that.
Sorry, I meant location, not state.
I feel strongly that this is not a grey area in regards to the fellowship unless one of the special circumstances of the tax code applies. The condition on your check list that is not being met is “away from main place of business.” When your residency is done and you move on, the city of your residency is now your former place of business. The city of your residency is not your main place of business while you are doing a fellowship.
Now, I can think of one MD in my community where I believe that I would recommend the deduction to her. She was already offered a faculty position in her residency department before leaving for an 11.5 month fellowship. Furthermore, during her fellowship, her husband, home and household goods remained in the residency city. So, I do think it is smart for each person to explore this as a possible deduction. But, I feel strongly that it would not apply to a majority of fellowship trained doctors amongst my acquaintances.
The majority are probably in fellowships longer than one year anyway. But there are plenty of docs who are situations like the MD in your community. At any rate, when I wrote the post, I mostly had in mind people going away for a month or a few months at a time. Many residents/fellows will do that at some point during their training.
I wish I would have paid more attention to this tax code as a resident. Spent two months in Italy doing Cardiac Anesthesia. Great time, but this could have helped tremendously. Oh well, another lesson learned.
Hi, how would this apply to 2021 tax return prep. We are in another state for less than 1 year, would we be able to do any of these deductions?
Thank you!!
Did you see the first line of the post? This deduction involved unreimbursed employee expenses. Which are no longer a deduction on Schedule A as of 2018. At least for most:
https://www.fool.com/the-blueprint/unreimbursed-employee-expenses/
@Katietsu:
I am afraid it doesn’t apply in that example either. I have just noticed this:
“Generally, your tax home is the entire city or general area where your main place of business or work is located, regardless of where you maintain your family home. For example, you live with your family in Chicago but work in Milwaukee where you stay in a hotel and eat in restaurants. You return to Chicago every weekend. You may not deduct any of your travel, meals or lodging in Milwaukee because that is your tax home. Your travel on weekends to your family home in Chicago is not for your work, so these expenses are also not deductible. If you regularly work in more than one place, your tax home is the general area where your main place of business or work is located.”
I think you’re getting carried away now. Imagine someone who travels to Milwaukee for a three month job assignment. His main place of business is in Chicago. Just because the main place of business or work this month is in Milwaukee does not make it his tax home. That’s the whole deal with a temporary work assignment. It ISN’T your main place of business or work. What’s the time period that determines if it is temporary? One year, defined by the IRS.
That was a direct quote from the IRS page on the subject. See my first post for the link.
From what I understand, if you have a job in one place and you are sent to work for a client temporarily in a different place, and your employer does not deduct travel expenses, you’re covered. If you get a new job in a new place, you are not covered, regardless where your family home is.
This is consistent with the way IRS deducts commuting expenses for employees: they only allow the cost of commuting between business sites, not from home to work and back.
Tl;dr: your post is great news to residents or fellows who temporarily rotate through another location as part of their training. The bad news is that it does not apply to a person who goes away on a different contract for a different employer, and it’s just a tax deduction, not a tax credit.
You have misinterpreted the point of the scenario. The Milwaukee job was that persons regular every day INDEFINITE job and not temporary (ie, less than one year). This should be plainly obvious and negates the last half of your post as this is exactly what they are laying out so its not attempted. Of course they arent getting you deductions for your regular job.
Many doctors know where they will be practicing after fellowship before it even starts, this would work. Many know they arent staying, this would work. Many are one year or less, this would work. Dont over think it, just check off the boxes to see if you qualify without any issues. If so, dont worry about it.
WCI,
I agree that this can be a great thing for many people doing remote rotations (as I did for 3 months during my residency), and for people doing shorter fellowships. Many fellowships in orthopedics and some other fields are one year or less, so this could help out some of those fellows.
My main question about this topic relates to your tax home, as mentioned by some of the above posters. To make my questions as clear as possible, I will give some examples.
Fellowship A
For the theoretical Dr. Smith, who lives in Cityville during residency, now graduates. For her fellowship, she lives out of state for 1 year. She returns to Cityville after fellowship to practice.
In this example, Dr. Smith’s fellowship is a temporary training experience of 1 year. Check. She is returning to her prior tax home. Check. There is no long term plan for employment at her fellowship institution. Good. This appears to pass the tests as described by WCI and the actual tax code. The entire ability to take this deduction depends on whether or not Dr. Smith maintains her tax home in Cityville. How does a fellow do that?
Example B seems to be more difficult to fit to the tax code.
Dr. Jones goes to residency in Metropolis in California. He graduates and then goes to fellowship out of state for 1 year. He decides to move back to California, but at the other end of the state in Small City, to start his practice. The new location in California is a new tax home due to the distance from his residency. Would Dr. Jones qualify for the fellowship deduction? Did his tax home move with him to fellowship?
The IRS documents discuss temporary job assignments in depth. One of the examples the IRS gives discusses the timing of when a temporary location becomes a new, permanent location–such as if you join the faculty at the fellowship. The timing of when you join would affect how much of the fellowship year was temporary. At the point someone signs to join the faculty at the fellowship, it is no longer temporary–and you lose the deduction for the rest of the year. However, if you sign after six months, you could still deduct six months of a temporary assignment (which could be really nice).
I think this is a complex issue that hinges on whether or not you can maintain your tax home and define your fellowship as temporary. Thank you WCI for brining it up! I have my fellowship starting in July, and have been hearing about the “fellowship deduction” for years–very timely post.
The IRS mentions a temporary “work assignment” not “job”. Hence fellowship A would not qualify unless it’s with the same employer. The tax home is not where the family home is; it’s where the main place of business is. Different jobs with different employers don’t qualify for travel expenses; the IRS does not pay you for visiting your family. There are millions of Americans who would deduct their rents while having a job in a different state than where their family home is. Huge loss and completely unfair to people who can only afford one place of living.
P.S. I am not trying to troll here. Incidentally, I am starting a remote one-year fellowship next week.
The typical example for this deduction is the traveling sales rep, unless the employer pays for travel expenses. Or the iRS agent who’s investigating a crime in another state than his usual place of work. Or a locum tenens doc with the same company, with no expenses paid.
Erv-
I understand that this issue seems black and white to you. What you’re not getting is where you see black and white, many people see gray. They see the 364 day fellowship as a temporary work assignment since they maintained a home where the old job was and intended (whether they actually did or not) to return to that job.
Is there a decent chance of an audit if you claim this? Yes. Is there a reasonable chance you could lose that audit/tax court case? Absolutely. But many people, including me, don’t see that as a 100% certainty. If you’re the type of person who doesn’t claim a home office deduction you deserve because you’re worried it would be an audit red flag, then you certainly don’t want to claim this. However, if you’re pretty aggressive with your taxes, then you might want to try it. There are certainly plenty of advisers out there recommending this to their clients. Everyone’s situation is a little different, of course.
If anyone knows a tax court case relating to this topic, I’d love to see it. But as near as I can tell, there is no definitive ruling.
This link seems relevant about what it takes to maintain a tax home:
http://www.nursingcenter.com/journalarticle?Article_ID=541697
This one too.
http://www.justanswer.com/tax/38a2s-tax-deduction-temporary-job-assignment.html
And this one, from a CPA specializing in MD Taxes.
http://pub38.bravenet.com/forum/static/show.php?usernum=3178427957&frmid=84&msgid=56374&cmd=show
My mistake, it seems.
I think my husband and I will be able to write off his living expenses during his fellowship because I am staying in our home city and will be maintaining a home in his absence.
He is an ophthalmology resident. Next summer he will do a fellowship out of the area (there aren’t any in our current city). The closest one is 80 miles away.
I will move out of our current rented home (as the lease will be up) into another home in the same city but will continue working my current job. My husband will go to the new city for one year, and then return to our current city to work as an attending. He’ll come home (let’s hope frequently) to see me.
I think it would be easy to justify this logic to a judge if you’re paying duplicate living expenses and maintaining two residences. The reason is because you can say that you have “no main place of business or work”.
See this website and example two for the reasoning:
http://www.smallbusinessnotes.com/small-business-resources/irs-publication-463-tax-home.html
Second, in regards to the fact that fellowship is a completely different job, I don’t think that matters after reviewing the first sentence on this topic at the IRS website: “Travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job.” “Profession” being the most important word here.
I’d be willing to take the risk. This will allow us to save for a down payment on a house instead of blow money on two rents, two internet bills, and frequent travel between two cities.
I think the fellowship has to be less than 365 days for this to work. I wrote a post about this here:
https://www.whitecoatinvestor.com/the-out-of-state-fellowship-tax-deduction/
My husband is doing a one year fellowship in Baltimore. We’ve paid moving expenses, rent, utilities, parking, etc. Myself and our son have stayed in Texas, where we own a home. He will be coming back to Texas after his fellowship is over. Any advice of whether it is worth contacting a CPA about taking all of those living/moving expenses as deductions? Obviously money is tight since we’re maintaining two households, and Baltimore is so expensive. I don’t want to pay a CPA’s hourly rate if the answer is “probably not.”
You sound like the type of person this post was written for to me. If money is tight you can learn to do your own taxes instead of hiring a CPA if you like.
Thanks for the quick response. I’ve always done our taxes in the past – I have an accounting background. We’ve never used a CPA before, but I may just pay for a consult this time to figure out what all is deductible, since it will be close to $25K spanning two tax years. Better to spend the money upfront than to spend it on an audit, I suppose.
Have you been audited? What was the big expense? If you prepare your own taxes, the audit is just you sitting down with the auditor and negotiating. Worse case scenario, you pay the taxes you would have otherwise paid plus some penalties and interest. You will always have the choice between taking the auditor’s offer and going to tax court to get something better. And you don’t even have to hire someone to assist you in tax court if you don’t want to.
Why don’t you bounce this off Johanna Turner, one of the moderators in the forum. She’d probably do a consultation for you for a fair price. She might even give you a general answer for nothing in the forum.
I met with a CPA about this today. He agrees my husband can take deductions for his one year glaucoma fellowship (see my above post). He said he has done this for MDs previously. One was audited, documentation was submitted, and the case was closed. He did caution us not to go overboard but thought we’d have no problem doing this.
Take the deductions that are rightfully yours.
That’s great news! Did he advise you on which items to deduct? Rent, mileage, moving expenses, trips for interviews, etc? If your husband is in fellowship, then we’re probably in the same boat…going on 9 years of little to no income and wanting to make sure we’re not giving money away….sure hoping this whole endeavor pays off soon!!
As alluded to by a poster in the WCI Forum, I, too, am curious as to whether this whole thing will even technically exist as soon as the new tax law takes effect.
Unfortunately, my understanding is that this tactic would be classified as “deduction(s) for unreimbursed employee expenses” (https://money.usnews.com/money/personal-finance/taxes/articles/2018-02-09/10-tax-deductions-that-will-disappear-next-year) and, therefore, no longer an option for this coming tax year.
As described, this is a PERFECT option for my current situation (starting a 1 y. fellowship out of state in July 2019, will frequently visit town where I did residency to visit significant other and – ideally – become employed upon completion of training). It would be a damn shame for this to vanish beforehand!
Not sure if Dr. Dahle himself – or anyone else, for that matter – has addressed this, but it seems like a fairly important thing to consider. Can anyone advise?
Also, can anyone elaborate on exactly what is required in terms of documenting one’s tax home? Can one simply have my license / address / financial institution in (and multiple visits to) a certain locale or is a signed lease and series of rent / mortgage transactions required? Details pertaining to documentation aren’t explicitly described in the most recent IRS publication (https://www.irs.gov/publications/p529).
B, did you do this? Or anyone else in 2018 and for 2019 taxes planning this. We are in the same boat. Moved to another state for wife’s one year fellowship . Kept home in old state and moving back and working in old state at university where residency was originally completed. Thanks
I’m due to start fellowship in July 2019, so I haven’t done this yet.
Still don’t have any additional insight regarding this. Main questions/concerns are as to what IRS would consider as “sufficient documentation” in case of a potential audit. Namely:
1. Is simply keeping a driver’s license/financial institutions/auto registration in current state sufficient for establishing a tax home? If not, what type of documentation would required?
2. Is one able to use address at residence in state of fellowship for purposes of W2 and still argue that the aforementioned are sufficient for maintenance of tax home? I could see this as being an issue if one state has an income tax and the other does not.
Any additional insight would be much appreciated.
I recommend putting a big disclaimer at the top of this post because these are no longer deductible for 2018 and after since the TCJA. If you have your own business, you should be able to take it on your business return (Schedule C or Form 1120S), but not on your personal itemized deductions (Schedule A).
Good point. Will do.