Millions of Americans transitioned to remote work in 2020 because of the COVID-19 pandemic. And for many, it’s not going to end anytime soon. A survey of 317 chief executives found that at least 74% intend to maintain some remote after the pandemic.
Remote working comes with its fair share of advantages and disadvantages. Many have saved money on commuting expenses and eating lunches out, but have missed out on the workplace camaraderie. There are also some consequences that may come as a surprise to many workers, including the effect that remote work can have on your taxes.
You May Be Subject to Double Taxation If You’ve Moved to Another State
One surprising impact of the pandemic was the number of people who moved. Roughly 16 million people have moved during the pandemic, many to an entirely different state. Because most employees have been working remotely — many of them now permanently — many Americans have taken advantage of their newfound flexibility.
The Personal Capital-Kiplinger survey revealed that more than a quarter (26%) of employed Americans say they plan to move within the next three years because of the pandemic. The top motivation: Finding a place with fewer people (29%).
There could be a couple of tax consequences to these moves.
First, if you resided and worked in two different states in a single year, you must file a tax return in both states. And once your residence is located in a different state from your employer, there could be even more issues.
Depending on the laws in the states where you live and work, you may have to pay income taxes in both states. Many states have reciprocity agreements where if you live in one and work in the other, you’ll only pay taxes once. Many states also offer a tax credit to help residents avoid this double taxation.
Unfortunately, seven states have what is called a “convenience of the employer” rule, requiring that employees pay taxes in the state where their employer is located. In this case, you could end up paying taxes on both states. The states that use this rule are Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York, and Pennsylvania.
Are you nearing retirement? Learn more about where may be a good place to settle down in your golden years: What are the Best States to Retire In?
Working Temporarily From Another State May Increase your Taxes
Another possible surprise is that individuals who work temporarily in another state could be subject to taxes in that state. During the pandemic, many workers traveled to stay with family or shelter in another state. Even if it’s only temporary, you could suffer a tax burden because of it.
Each state has its own rules for taxing temporary visitors working in their state. The good news is that 13 states have temporarily agreed to waive this tax rule during the pandemic. Those states are:
- New Jersey
- Rhode Island
- South Carolina
Can I Deduct my Home Office Expenses?
Plenty of people have spent money creating a home office space for themselves during the pandemic. They also likely saw their utility bills increase, since they spent their days working at home. One of the most common questions that remote workers have is whether those expenses are tax-deductible.
Unfortunately, the answer is no for W-2 employees. In the 2017 Tax Cuts and Jobs Act (TCJA), Congress eliminated the home office deduction for workers on a company’s payroll.
If you’re self-employed, the news is better. Entrepreneurs and other independent contractors can deduct expenses that are “ordinary and necessary.” According to IRS guidelines, ordinary expenses are those that are common and accepted in your industry. Necessary expenses are those that are helpful and appropriate for your work. Business use of your home is a deductible expense.
Using the IRS guidelines, self-employed individuals can take a standard deduction of $5 per square foot of your home that you use for business, with a cap of 300 square feet. You can also write off a percentage of your inter and utility bills, proportional with the percentage of your home is made up by your home office.
Next Steps for You
Depending on your situation, your tax situation may be more complicated than in previous years. If you’ve resided in more than one state this year or temporarily worked in another state, consult a tax professional for advice on filing your taxes this year. If you’re self-employed, a tax professional can also help you to ensure you’re taking advantage of all the deductions you’re eligible for.
Want more insights for self-filing your taxes this year? Check out the Personal Capital Guide to Filing Your Taxes in 2021.
Personal Capital compensates Erin Gobler for providing the content contained in this blog post.