If you are among the millions of people who have worked from outside your home state this year, tax season can get tough: you may have to file tax returns and pay taxes to more than one state for 2020.
The challenge is that each state’s tax system is a unique mix of rules and this year is even more confusing due to changes related to pandemics.
Here’s what to know.
Q: I worked in two states in 2020. Does that mean I owe more taxes?
A: Maybe yes, but it depends on the conditions.
Some states have no income taxes, but almost everything they impose on workers who are in transit. Many of these states – including New York and California, which are known to be aggressive – will still levy taxes on remote workers through 2020.
However, not all remote workers will face new cross-border pressures. About 15 jurisdictions, including Maryland, Virginia, and the District of Columbia, have long-standing agreements with neighbors that allow commuters to file and pay taxes where they live.
Fifteen states and the District of Columbia have said they will not enforce their tax rules on remote workers who have worked in their state due to the coronavirus, according to American Institute of CPAs spokeswoman Eileen Sherr, who is tracking this evolving data .
In some cases, remote workers could be net winners and owe lower overall state taxes for 2020 if they are in a low or no-tax state. For example, Texas has no state income tax, so a San Francisco technician moving there may be able to avoid the high California income tax on compensation he earned in Texas.
Q: Why should I file two states and maybe have to pay taxes?
A: Each state tax system is a unique blend of rules that take into account how long an employee has been there, what income is earned, and where the employee’s real residence or domicile is.
These rules are famous for taxing non-state entertainers and athletes like Michael Jordan and Alex Rodriguez. But this year, such rules will make filing and paying regular people working remotely because of the pandemic more difficult. Take the examples of a Seattle-based technician who temporarily moved to his parents’ home in Oregon or a New York banker who set up a desk in a Florida beach house.
Many states have loans to prevent or reduce double taxation. However, these credits may not fully offset taxes elsewhere if the remote work is in a state with higher taxes than the home state. For example, an employee in Seattle who works remotely from Oregon during the pandemic and owes Oregon income tax will not receive credit from Washington because they have no income tax.
Q: How do states know someone has worked there?
A: In different ways. Employers will put information on W-2 forms, and tax advisors will ask their clients and not provide false information that could put them at risk. Do-it-yourselfers should remember that tax returns are signed under penalty of perjury.
Q: How do I start my taxes this year if I’ve worked in more than one state?
A: First, determine where you were in 2020. How many countries have you worked in? How many working days did you spend in each state?
Next, find out the criteria to qualify as a taxable resident of the states you were in.
Are there any special pandemic rules that will make them different this year? Does the state you worked in have an agreement with the state your office is located in to prevent double taxation? These are common in states that share a border, such as Wisconsin and Illinois.
You can find more information on preparing for the tax season as a remote worker here.
Q: How do I find the rules for the states I’ve worked in?
A: Please visit the state tax websites or this AICPA table for more information.
Also, check out taxes for non-residents if you’ve worked in a state but not long enough to be a resident there. Most states have these rules.
Q: What else should I do?
A: Talk to your employer. State tax authorities can be aggressive, but they can stop if your employer reassigned you to an existing office in another state and then withheld taxes for that state.
“Residence” also counts. State tax law often takes into account where the worker’s real home is in addition to the time spent in the state. Key factors include where someone votes, belongs to a club or religious affiliation, has a driver’s license, and plans to be buried.
Finally, think seriously about getting professional help if your situation is complicated – for example, if you got married, sold a house, or had a major loss or loss.
Q: What if my job is in New York but I worked from another state?
A: A controversial rule is likely to affect thousands of New Yorkers and others whose offices have closed this year because of the pandemic. The rule will become more important as teleworking outside the state becomes more common, especially as more states adopt it.
The “convenience” rule taxes people who have a job – not where they live or work, unless the employer demands remote work in a bona fide workplace.
In other words, someone with a New York-based job who lives and teleworks in another state still owes New York full income tax on that compensation. If the other state also taxes that income and does not credit New York City tax – as some states do not – the worker is likely to be double taxed.
New York isn’t the only one to enforce the convenience rule. Arkansas, Connecticut, Delaware, Nebraska, and Pennsylvania have it, too, according to AICPA’s Ms. Sherr.
The rule this year is that many people work remotely not because they want to, but because their offices have been closed. This fact cannot make any difference. For example, New York still wants workers with jobs in New York to pay New York income taxes, even if they have worked remotely from New Jersey for most of 2020.
In addition, Massachusetts would like people who work in Bay State to continue paying Massachusetts income taxes even after having worked in New Hampshire for most of 2020. New Hampshire has sued Massachusetts in the US Supreme Court on the matter, but the Supreme Court hasn’t said whether it will take the case.
You can find more information about the convenience rule here.
Q: Do New York City residents have to pay income tax if they worked outside of NYC during the pandemic?
A: Yes, because people who telework because of the pandemic still live in New York.
Q: What if I am self-employed?
A: Business owners who worked in more than one state in 2020 may also be required to file and pay taxes to those states.
Q: Can I make a home office deduction for working from home in 2020?
A: Not if you’re more of an employee than a business owner. As part of the 2017 tax revision, Congress almost doubled the standard deduction and canceled several depreciations according to Appendix A. One of these was a partial deduction for non-reimbursed employee expenses, e.g. B. a home office.
Self-employed entrepreneurs can usually deduct a range of expenses, including for home offices.
The good news for employees is that companies can reimburse them for many pandemic costs for working at home, such as: B. better internet services or office equipment. These payments are deductible by the employer and do not count towards income or FICA taxes as compensation for employees.
You can find more information about home office prints here.
Write to Laura Saunders at [email protected]
Copyright © 2020 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8