Tax Considerations for Legislator Per Diem Payments
This article is intended as general guidance to help legislators and their tax return preparers in handling legislator per diem payments during the 2017 regular and special legislative sessions. Legislators should consult with income tax experts for specific requirements relating to individual circumstances.
Legislators Living More Than 50 Miles From the Capitol
Note: The per diem payments of legislators living more than 50 miles from the Capitol are not reported on their W-2 Forms. In order to receive this preference, all legislators that served during the 2017 Legislative session who live more than 50 miles from the Capitol signed a certification promising to make an election under 26 U.S.C. 162(h) when they file their taxes. This article explains how to make the election.
For legislators living more than 50 miles from the Capitol, per diem payments that do not exceed the amount allowed by federal law are considered:
Reimbursements made under an accountable plan;
Not taxable income to the legislator;
Not subject to withholding or reporting by the employer.
The difference between the amount allowed by federal law and the actual amount of per diem paid to a legislator is considered an unreimbursed expense and may be a "miscellaneous items" deduction, subject to certain limitations.
Per Diem Is a Reimbursement Under an Accountable Plan
Per diem payments made to a legislator living more than 50 miles from the Capitol are considered employee reimbursements under an accountable plan for the following reasons:
Under 26 U.S.C. 162(h), a legislator that makes an election (see below for instructions) is considered to have substantiated living expenses if the legislator's place of residence is more than 50 miles from the Capitol building.
Under federal law, reimbursements under an accountable plan are treated as follows:
They are excluded from the employee's gross income.
They are not reported as wages or other compensation on the employee's Form W-2.
They are exempt from the withholding and payment of employment taxes (Federal Insurance Contributions Act (FICA), Federal Unemployment Tax Act (FUTA), and 26 CFR 1.62-2(c)(4)).
Calculating Maximum Exemption Amount and Potential Miscellaneous Deduction
For a legislator living more than 50 miles from the Capitol, the total substantiated amount (not taxable) under federal law (26 U.S.C. 162(h)(1)(B)) may not exceed the greater of the federal per diem rate or the state per diem rate for Helena, as long as the state rate does not exceed 110% of the federal rate. Montana’s rate did not exceed the federal rate. During the 2017 regular and special sessions, the state rate for lodging in Helena was $99 plus applicable taxes, and the state rate for meals was $23, for a total per diem rate of $122 plus taxes (2-18-501, MCA). The federal per diem rate during the 2017 regular session was $95 for lodging and $64 for meals and incidental expenses for a total regular session per diem rate of $159 per day. The federal per diem rate was $4 higher during the special session, which created a special session per diem rate of $163 during this timeframe (for details, see U.S. General Services Administration rates on the internet at https://www.gsa.gov/travel/plan-book/per-diem-rates).
During the 2017 regular legislative session, the Senate had a 9-day transmittal break from February 25 through March 5, and the House had a 5‑day transmittal break from March 2 through March 6. Additionally, both chambers had a 4‑day break from April 14 through April 17. There were no breaks during the 2017 special session. Because Montana law (5-2-301(3), MCA) provides that legislators may receive per diem reimbursements for only 3 days of a break, legislators from both chambers were only paid per diem for 3 days of each regular session break. Thus, per diem was paid for a total of 115 regular legislative days and 3 special session days at $114.39 per day, for a total per diem reimbursement of $13,498.02.
However, the federal tax code (26 U.S.C. 162(h)(2)(A)) only allows reimbursement for deemed living expenses during breaks of 4 consecutive days or fewer. Thus, a tax return preparer may determine that the transmittal break (for both the Senate and the House) exceeded the 4‑day limitation under federal law and subtract all 3 days of the per diem paid for the transmittal break from the total reimbursement amount that may be considered not taxable. If a tax return preparer follows this approach, only 112 regular legislative days would qualify under federal law, while all 3 of the special session legislative days would qualify.
If a tax return preparer multiplies 112 regular legislative days by $159 per day (using the higher federal per diem rate), the total would be $17,808. Likewise, if a tax return preparer multiplies 3 special legislative days by $163 per day (using the higher federal per diem rate), the total would be $489. The resulting total under this approach that could be considered a nontaxable reimbursement for deemed living expenses is $18,297. This amount is $4,798.98 more in deemed living expenses than the $13,498.02 that each legislator actually received. Thus, a tax return preparer may determine that the $4,798.98 is an unreimbursed business expense that may be reported as a miscellaneous itemized deduction on a 1040 Schedule A. If the additional amount is claimed as a miscellaneous itemized deduction, then further reductions may be required for a meals allocation, in addition to other reductions. IRS Publication 529 contains additional information regarding miscellaneous deductions and is available for download at www.irs.gov. Additionally, a tax return preparer may also desire to read 26 CFR 1.62-1T(e)(4), regarding the allocation calculation between lodging and meals for State legislators.
Under 26 U.S.C. 162(h), state legislators who live more than 50 miles from the Capitol may elect to claim their legislative district residence as their "tax home". These legislators signed a certification promising to make an election concerning their residence under 26 U.S.C. 162(h). Consequently, legislators who fall into this category should share this article with their tax return preparers or become familiar with the regulations and the manner in which they are to make the election. The U.S. Department of the Treasury published regulations for making this election, which may be found under 26 CFR 1.162-24. The portion of the regulations regarding the residency election provides as follows:
(e) Election -- (1) Time for making election. A taxpayer's election under section 162(h) must be made for each taxable year for which the election is to be in effect and must be made no later than the due date (including extensions) of the taxpayer's Federal income tax return for the taxable year. (2) Manner of making election. A taxpayer makes an election under section 162(h) by attaching a statement to the taxpayer's income tax return for the taxable year for which the election is made. The statement must include-- (i) The taxpayer's name, address, and taxpayer identification number; (ii) A statement that the taxpayer is making an election under section 162(h); and (iii) Information establishing that the taxpayer is a state legislator entitled to make the election, for example, a statement identifying the taxpayer's state and legislative district and representing that the taxpayer's place of residence in the legislative district is not 50 or fewer miles from the state capitol building.
Legislators Living Outside of Helena but Less Than 50 Miles From the Capitol
Per diem payments to legislators who did not live in Helena but within 50 miles of the Capitol are not considered substantiated reimbursements. Thus, these payments are reported as income on the legislator’s W-2 form, and taxes are withheld on these payments. However, all legislative lodging and meal expenses actually incurred by these legislators in excess of the per diem payments are considered unreimbursed expenses and may be reported as a "miscellaneous items" deduction, subject to certain limitations. IRS Publication 529 contains additional information regarding miscellaneous deductions and is available for download at www.irs.gov.
Legislators Living in Helena
Because 26 U.S.C. 274(d) requires out-of-town travel before a person can claim lodging and meal expenses, a legislator residing in Helena during the session may not claim any meal and lodging expenses incurred in Helena for session activities. Also, under 26 U.S.C. 162(h)(4), the special provisions allowing use of the federal per diem rate do not apply to per diem payments to these legislators, so they must follow the provisions of 26 U.S.C. 274(d) and specifically substantiate all lodging and meal expenses that they do claim for out-of-town travel.
Per Diem Payments During the Interim
This article does not address legislative per diem payments that are made during the interim. Unlike during a legislative session, during the interim, legislators are only paid expenses when a claim is submitted.