If you're one of the millions of Americans who worked remotely last year during the Covid-19 pandemic and you worked even briefly outside of your home state, you could wind up with a surprise tax bill this spring.
"Each state has its own rules," says Eileen Sherr, a CPA and the director of tax policy and advocacy with the American Institute of Certified Public Accountants. You may need to file returns and pay taxes to more than one state for 2020.
If you didn't know about those potential implications, you're not alone. Almost half, 47%, of adults who worked remotely during the pandemic were unaware that each state has its own laws related to telecommuting, according to an AICPA survey. And 71% said they were unaware that working remotely in different states could affect the amount of state taxes owed.
If your remote work took you to multiple states last year, here's what you need to know about filing your taxes, according to tax experts.
Briefly working in one state while residing in another might mean you're on the hook for taxes in both locations — but the rules vary depending on the state pairings involved and how long you worked in a particular location.
"It gets quite complicated state by state," says Howard Samuels, a certified public accountant at Samuels & Associates in Florham Park, New Jersey.
And it's hard to give general guidance, since this issue varies so widely depending on where you live and where you worked. "You can't make sweeping generalizations about this domicile issue because everybody's got a different kind of situation," says John Wheeler, a CPA and senior financial consultant at Castle Wealth Advisors in Indianapolis.
Wheeler recommends consulting a tax professional, especially if you hopped locations several times. "It's very difficult for you as an individual, other than looking these [state] statutes up, to do this yourself," he says. "I think that's where you really need the help of a good tax accountant."
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You may not have extra tax obligations if your remote work took you to certain states.
Some bordering states have longstanding agreements to help offset out-of-state tax burdens. "Several states have reciprocity agreements — like in Maryland, Virginia, and Washington, D.C. — that if you are working in a neighboring state you can just keep [paying taxes] where you live," Sherr explains.
Plus, "a few states don't have any income tax, so this issue won't affect you" if you worked there temporarily, Sherr says. States without income tax in 2020 include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming, according to AARP.
And 15 states have issued special guidance, saying they won't tax people who moved in temporarily during the pandemic, Sherr says. Those states include Alabama, Georgia, Illinois, Indiana, Massachusetts, Maryland, Maine, Minnesota, Mississippi, Nebraska, New Jersey, Pennsylvania, Rhode Island, South Carolina, and Wisconsin.
"If there isn't special guidance, you may owe [taxes] where you're working as well as where you're living," Sherr says.
The amount of time you spent working in a state and how much you earned while there could affect whether or not you're required to file a nonresident tax return and pay taxes. "You'll want to go back for 2020 and figure out how many days you were in each state," Sherr says. Be specific about your location, since many counties and cities levy income taxes, too.
For example, in New Mexico employers must start withholding state taxes if an employee has been in the state for more than 29 days. But in New York, the laws are much stricter. Employees who work in New York even one day are required to file a return, according to the Mobile Workforce Coalition.
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To help you figure out the requirements, the Mobile Workforce Coalition has created a map listing states' filing rules for 2020. The AICPA also created a chart detailing state filing guidance for the 2020 tax year, and you can also check your state's tax websites for the most updated information.
If the state you lived or worked in has not provided any guidance on this issue, "you need to follow the regular rules," Sherr explains. "You would need to file as a resident where you live and also as a nonresident wherever you worked."
Sherr gives the example of someone working in California who went to Arizona for part of the pandemic. "You potentially could owe in both California as a resident, because that's where your main house is, and also if you've been working in Arizona, you could owe it [taxes] in Arizona as well," Sherr says.
But 43 states and Washington, D.C., do offer a tax credit known as a resident credit for taxes paid to another state, according to the AICPA. So in Sherr's example, this taxpayer would claim a credit on their California return for the taxes they would pay to Arizona.
The states that don't provide a credit for state taxes paid to another state include New Hampshire, Texas, Nevada, Washington, Wyoming, Florida, South Dakota, and Alaska.
If you worked in a state that doesn't provide a credit and taxes income, your tax bill could be slightly higher this year, according to Sherr.
You might also owe interest and penalties when you file your taxes, if you didn't pay taxes last year to the states where you worked, either by having tax withheld from your paycheck or making estimated tax payments.
If you're hoping to just ignore your obligations to other states when filing your taxes, think again. Taxpayers "cannot ignore this issue because the state is going to want its share of taxes if you worked in their state," Sherr says. They may be able to determine you have been working there through records from your employer or an audit.
Advocates hope lawmakers will act to make things less complicated before the next tax season. In June of 2020, Sen. John Thune (R-SD) and Sen. Sherrod Brown (D-OH) introduced a bill, known as the Remote and Mobile Worker Relief Act, under which workers who traveled to another state for employment because of the pandemic could not be subject to that state's taxes unless they worked there for more than 90 days.
"We're hopeful that it will get through Congress," says Sherr, "and will be something that might simplify taxes next year."
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