Here's How Remote Work in a Different State Can Affect Your Taxes
The pandemic forced us all into a lot of unique situations—and for many, that meant creating makeshift workspaces at home. More than a year later, many of those temporary work-from-home employees still don't have hard-and-fast dates for returning to the office. While setting up shop in your family room has some benefits (like no commuting costs and fewer lunches out, for example), it also has some not-so-great financial implications (including higher utility bills or the need for new office furniture). Working from home also has one very large—and not so obvious—consideration: your tax bill.
Though you may initially think of the favorable ways working from home might affect your tax bill, namely the ability to deduct a portion of your home and any associated office expenses, it's not that simple. "The average employee will not be able to write off any home office expenses," says Nayo Carter-Gray, a QuickBooks ProAdvisor and founder of 1st Step Accounting in Baltimore, Maryland. "Unfortunately the Tax Cuts and Jobs Act eliminated the unreimbursed home office expense deduction a few years ago." The exception: Independent contractors, like freelance writers or self-employed financial advisors, for example, can deduct home office expenses when they fill their tax returns.
If you're an employee newly working from home, you're not entirely out of luck, though. Employees should ask their employers if they would be willing to reimburse for any home office expenses—like that second monitor or printer you needed—because the employer can generally get a business deduction for these costs, says Carter-Gray. The bigger consideration for most remote employees is how much state tax they pay and to who—something that directly relates to where their home office is located. Here, we asked the experts to advise us in the details.
If you work in the same state you live...
If you're hunkering down in your New York City apartment just downtown from where your normal office is located, chances are this won't change the way you file your taxes. (Lucky you!) It's still worth checking, though—some local municipalities have different tax rates, says Carter-Gray. For example: If you live in New York State and are no longer commuting to an office in New York City, you may not have to pay those expensive New York City taxes this year.
If you work in a different state from where you live...
If you've moved during the pandemic—say you relocated to a relative's house in another state or decided to rent a house in wine country (why not!)—you'll likely face new tax requirements. "As an employee, relocating means you may have multi-state income tax filing requirements," says Carter-Gray. "You will definitely need to inform your employer, so that the payroll department can adjust your state withholding for the new state you are currently residing in." Here's where things get tricky, though. Different states have different requirements about when you need to file a tax return if you've earned money in that state. In New York State, you're liable to pay income tax even if you only spent one day working in the state. In Utah, however, you have 60 days before you have to file a tax return.
It gets even more complicated than that. "Some states have reciprocity agreements in place that will allow your income to not be taxed in both states," she explains. In Maryland, Pennsylvania, Virginia, West Virginia, and Washington, D.C., employees are granted reciprocity. And New Jersey and Pennsylvania have a similar agreement. In some cases, like Connecticut, states grant employees tax credits to pad the added expense. There's a bit of good news though: Just because you have to file taxes differently doesn't mean you'll end up paying more. In some cases, this scenario may actually benefit you. If you normally work in a high-tax state like New York, but are currently working in a no-income tax state, like Florida, you'll likely come up ahead this year.
What about federal taxes?
"There generally isn't any impact on federal taxes for relocating throughout the year—unless your relocation is to a different country," says Carter-Gray. "Your income could be considered foreign earned income and subject to different tax laws if you lived and worked outside the US.
So, what should you do?
If you have any questions about your taxes and what returns you need to file, it's best to speak with a certified public accountant (CPA) who can help you navigate complex tax laws and ensure you file correctly based on your personal circumstance.