If you worked from home in 2020, there’s a chance you might be required to send the government even more money at tax time. Here’s why.
The COVID stay at home orders caused large numbers of US workers to begin working from home. Some workers even relocated, so they could work remotely from more pleasant states. If that’s you and your work location was in one state, but your residence is in another, you’ll want to consult the income tax rules of both states.
State Income Tax rules are too complex to detail here. But here are four things it may help to know, as well a piece of good news.
First, the Withholding Rule. Did you know that you need to adjust your state tax withholding if you shifted to a remote work location that is in a different state from your place of work? If you didn’t, you’re not alone. According to an AICPA Poll, 55 percent of those who worked remotely during the pandemic were unaware that failing to update their state tax withholding could result in tax consequences. Every state has their own tax laws related to remote working. If COVID has you working from a different state as your employer’s office, you need to review both state’s rules.
Second, the Convenience Rule. The Convenience Rule holds that if your job is based in one state but, out of convenience, you live and work in another state, you will owe income tax in the state where the job is based. Perhaps COVID originally put you in this situation, but now you and your employer have decided that you can continue to work remotely. Fair enough. But beware: come April you may end up owing income tax to both your state of residence and the state of your work-place. Check the specifics in your employer’s state.
Third, know the State Filing Rule if you are working in a new state. The rules for when you need to file state income tax will vary by state. In New York, for example, you must file on the first day you work in the state. But in Arizona, you would file on day 61. If you now work in a different state due to COVID, be sure to check that state’s filing rule.
Lastly, what some have called the “Jordan Rule” wasn’t invented in 1991, but it came to prominence then. In brief, Los Angeles, angry at Michael Jordan for leading the Bulls to victory against the Lakers that year, decided to tax the Bulls’ players for the portion of salary they earned during their games in LA. Not to be outdone, Chicago responded in kind toward LA’s players. It’s a farcical tale with a clear lesson: if you work often across state lines, beware of the minutiae of each state’s income tax rules.
Here’s a bit of good news regarding State Income Tax. Some states have tax benefits that can help you, such as reciprocity agreements to keep workers’ income from being taxed twice. New Jersey, Pennsylvania, Maryland, Virginia, West Virginia and Washington, D.C all have these arrangements in place. In other cases, states offer tax credits to avoid the problem of double taxation, as occurs, for example, between Connecticut and New York. Be sure you know the benefits for which you may qualify.
The tax professionals at Pine & Company CPAs are here to help: These are just a sampling of some issues related to multi-state taxation that COVID has brought front and center. The applicable rules for you are complex and will vary, depending on your states of work and residence. Throughout the pandemic, we have been addressing these issues proactively with many of our clients.
If you've been working remotely in 2020 or plan to do so in 2021, Schedule a Tax Consultation with Pine & Company, CPAs. We’ll help avoid or minimize any unpleasant surprises at tax time. Our goal is to help you pay the taxes you owe, but not a penny more.