Did You Work From a Different State for All or Most of the Pandemic This Year? Here’s How Your Taxes Might Be Affected
Knowledge is power this tax season.
2020 came with more than its fair share of change (to say the least), including an enormous spike in both moving and remote work. With nearly all office workers working from home to slow the spread of COVID-19, the work-from-home life has been the norm since March. Many people have used the relative freedom of not needing to report to the office to live somewhere else for a time, moving in with family to stay together during the pandemic, moving to less crowded areas, or trying a workcation to relax a little in the middle of this madness.
Wherever you went during the pandemic and for whatever reason, there are some consequences of working from a new location beyond the mail piling up, or your plants withering while you're away from home. Mainly, your taxes might look a little different, especially if you worked while living in a different state than the one where you're employed or have your permanent residence.
"A lot of people are moving around, so there could be more complicated tax implications," says Scott Taylor, CFA, a financial advisor at Northwestern Mutual. "There are certain states and certain situations where you could be double taxed."
Before you panic about your tax bill, though, remember that every tax situation is different. Chances are good that you won't be double-taxed—or taxed for the same income in two different states, paying twice as much in taxes as you normally would—but you do want to be aware of what tax laws apply to you and your unique remote work situation. As with all things tax-related, if you have questions, reach out to an accountant to discuss your situation.
First, if you've been working from home in the same place you normally live, nothing will change for your taxes this year. You'll file your taxes as you always have and either owe money, based on your withholdings for the year, or receive a tax refund.
If you have traveled to another state (or several) and worked while there, you may owe taxes in the state where you worked, even if you weren't there for the whole year. States have different rules for how long someone must be there before they're considered a resident for tax purposes. Claire Grant, a financial writer at investment services company Stash, says most states count someone as a resident after they have stayed in that state for 183 days, even if their primary residence is in another state. Other states may have shorter or longer time ranges: If you've stayed in a state for an extended period of time, talk with an expert to see if you qualify to be taxed in that state.
If you do, there's still no need to panic. Many states have reciprocity agreements that allow workers to live in one state and work in another without getting double-taxed, so you can likely avoid owing more than you'd like. Taylor says you can work with a CPA to figure out how to do so.
If you moved permanently, you should have changed the address associated with your HR department, bank accounts, driver's license, mail delivery, and other key accounts. Doing so makes your move official, so to speak, and means you no longer owe taxes in the state you moved from after the move. If you did not change this information during your move, you may face some challenges.
Those who will see the biggest changes in their taxes are people who moved—permanently or temporarily—from a state with no income tax to a state with income tax. Their taxes will be much higher than in the past, particularly if they did not adjust their withholdings accordingly. "If you do move from a lower income tax state to a higher income tax state, I would make sure you're withholding the right amount of money," Taylor says.
Another group that should pay attention during tax season are those who moved from states with high income taxes to those with low or zero income taxes—and are trying to avoid paying state income tax.
"If you want to move there for a couple months just to lower your taxes, that's probably not going to happen," Taylor says. States want to collect income taxes and will likely not overlook temporary moves. Unless you took steps to change your permanent residence, you will probably not be able to get away with paying no or less money in state taxes.
As remote work stretches on, you may still be considering moving for a few months or forever—a fine idea, as long as you're doing it for the right reasons. "If you're going to move to another state, do it because you really want to," Taylor says. "Don't pick up and go because you want to reduce your tax bill."
If you did spend substantial time in another state this year and are concerned about the implications, contact a professional, do your research, and stay calm—like everything else, we'll get through tax season, too.