This year tax season could be more challenging than ever. If you are one of the millions of people who worked outside your state of residence, you may be obligated to pay taxes to more than one state. These rules are normally complex and are further complicated by the pandemic. Here is a guide on how to navigate them:
If you worked from two states in 2020, as many have had to with the switch to remote working back in Spring 2020, your tax liability depends on the states involved. Nine states currently do not have an income tax; however, out of the remaining 41 that do, most states impose taxes on commuters. New York and California are particularly aggressive and are set to place taxes on remote workers in 2020. Certain states, however, have reciprocity agreements with neighboring states that allow commuters to file and pay taxes in their state of residence. There are currently around 15 of these jurisdictions. Additionally, 15 states (and the District of Columbia) have come forward to say that they won’t enforce their states rules on remote workers who worked in their state because of the coronavirus pandemic.
Many states provide credits to prevent or reduce double-taxation. Two tax returns (a resident and a non-resident) must be filed. Individuals may then file for credit in their state of residence for the taxes they paid in their work state. It is important to note that these credits may not always fully offset the taxes paid in your work state, especially if your work state has higher tax rates than your home state.
There Can Be Winners:
In a few instances remote workers can be financial winners if they work in a low (or no) income tax state. For example, if a California tech worker works remotely in Texas (which has no state income tax) they might be able to avoid the high California tax on compensation earned in Texas.
Special Consideration: New York Filers
New York’s “convenience” rule will likely affect thousands of New Yorkers and commuters whose offices were closed this past year. The convenience rule taxes individuals where a job is based, not where they reside or work. Those with New York based jobs who live and work (virtually) from another state still owe full income tax to New York state. If your state of residence taxes your income as well and doesn’t give a credit for the New York tax, then a worker would be obligated to pay both taxes (resulting in double-taxation).
Filing Your Taxes:
To start, individuals should determine where they worked in 2020. Consider what states you worked in and the number of working days spent in each state. Next, find out the criteria for being considered a taxable resident of the relevant states. There may be special pandemic rules, or your state may have a reciprocity agreement that prevents double taxation. To find this information turn to your state(s) tax website(s).
Individuals who are self-employed and worked in multiple states would also need to file and pay taxes to those states. It is important to note that self-employed business owners may be able to take a home-office deduction.
Talk to your employer. State tax authorities may refrain if your employer assigned you to an existing office in another state and then withheld taxes in that state. If you feel confused or overwhelmed by your tax situation, talk to a professional advisor.