The federal government doesn't offer tax deductions that cover the typical living expenses that most people incur. However, if your business or employment requires you to set up temporary living quarters in a different geographic area so that you can complete a work assignment, your situation may entitle you to take a substantial deduction for your living expenses.
Your Tax Home
To qualify for the deduction, you must incur the expenses while traveling away from your tax home. Your tax home isn't necessarily the place where you live -- it's the general area where you typically work. However, if you travel a lot and don't have a single work location, your tax home is the place where you live. In addition, to qualify for the deduction, you must be away from your tax home for more than a typical work day and have to stop for rest before returning home. You should have no problem satisfying this requirement if your work duties prevent you from returning home at the end of each day, and as a result, you must secure temporary housing.
Eligible Work Assignments
The duration of your temporary work assignment is also a key factor. To deduct temporary living expenses, the work assignment must be in a single location, expected to last less one year or less -- and actually does. If the assignment's duration is indefinite, meaning it's expected to last more than one year, the location where you're working becomes your new tax home. This means that you can't deduct a single living expense even if you intend to return to your previous tax home, or the assignment's actual duration ends up being one year or less.
Deductible Living Expenses
Temporary living expenses that are deductible include the cost of hotels and temporary apartments as well as the monthly utility charges for things like gas and electricity. Your transportation costs that relate to the work assignment while away are also deductible, so if you drive your own car to the new location, you can either deduct your actual car expenses such as gasoline and oil, or instead use the standard mileage rate. But if you decide to rent a car, you can deduct all rental charges and gasoline costs, though you'll have to allocate the expense between the miles you drive for work and those driven for personal purposes. Other deductible living expenses cover things like the cost of transportation to return to your permanent residence on days off, charges for shipping personal items to the temporary location, dry cleaning, laundry, business phone calls and office services, reasonable gratuities for hotel staff and even 50 percent of your meal costs.
Reporting The Deduction
If you incur deductible living expenses as an employee, report them on Form 2106 or, if you incur car expenses and choose to use the standard mileage rate and don't receive reimbursements from your employer, use the simpler Form 2106EZ instead. However, if you're self employed, the expenses are reported on a Schedule C or CEZ as regular business expenses. And if your employer reimburses you for any living expense, you can't take a deduction for it.
Michael Marz has worked in the financial sector since 2002, specializing in wealth and estate planning. After spending six years working for a large investment bank and an accounting firm, Marz is now self-employed as a consultant, focusing on complex estate and gift tax compliance and planning.