One important point is that your living expenses while living at home are not tax deductible. Your employer can pay you a supplement for your living costs, but it’s not tax-free or tax deductible, because everybody has ordinary living costs when they are at home. When you are traveling away from home, your costs can be tax-free or tax deductible because they represent increased costs that you have to pay because of work. However, there has to be a point at which you are no longer temporarily away from home, you are simply living in a new home.
IRS publication 463 discusses the concept of a “tax home“. This is the place where you earn most of your wages, and have most of your economic connections. Living expenses in the area of your tax home are never tax deductible or tax-free. Temporary travel away from your tax home can be tax-free, but if you are away long enough that you have established a new tax home, then you are no longer temporarily away, and your living expenses are no longer part of a temporary assignment. The IRS defines this as one year, or indeterminate.
There is no rule about a one month break resetting the clock, that appears to be something that your friends have made up or got from a dodgy Internet source. The question is, how long are you away from your tax home and have you established a new tax home.
For example, suppose your tax home is in Michigan, and you have been temporarily working in Connecticut. If your contract ends, and you go home to Michigan, and then you accept a new contract in Florida, it may be reasonable to consider Michigan as continuing to be your tax home. (Neither Connecticut or Florida are your tax home at this point.) However, if you go home to Michigan, and then accept a new contract also in Connecticut, would it still be fair to say that Michigan is your tax home? Especially if you knew before you went back to Michigan that you were planning to accept a new contract in Connecticut. Those facts and circumstances would tend to establish that your intention is to remain in Connecticut longer than one year, which makes Connecticut your new tax home.
A possible argument could be made that because your third and fourth contracts are at a location that is more than 50 miles away from the location of your first and second contract, that resets the clock to the date of the third contract. However, I don’t think this argument holds water, because either way, your intention seems to be to live and work in Connecticut for more than one year, which means that you can no longer consider your original home state to be your tax home for purposes of the travel rule. Intent is important here, see the examples given in publication 463.
As an example, I once had a work colleague who lived with his family in Buffalo New York, and traveled to Rochester to work. He worked Monday through Thursday, spending the nights in a small apartment, and returned to his family in Buffalo for three day weekends. If this was a temporary assignment, then his tax home would be Buffalo, and he would be allowed to deduct his travel expenses or have them covered by the employer. But because he kept this job more than a year, Rochester became his tax home for purposes of the travel rule, and his travel and lodging expenses were not deductible or eligible for tax-free reimbursement.
Does this help?
Based on your verbal description of your plans, Connecticut is your tax home now, because you plan to extend your stay to more than one year. Based on the contracts that you plan to sign, Connecticut will be your tax home as soon as you sign your fourth contract. Living expenses with in the area of your tax home are not eligible to be reimbursed tax-free. If you want a different answer, or if you want to explore the concept that you can retain your original state as your tax home by returning there for some minimum number of weeks, then you may wish to consult a tax professional in your area, who will stand behind their answer, and defend you in case of audit.
