Large portions of the workforce transitioned to working from home as the coronavirus pandemic grew. With COVID-19 still gripping our nation, that trend will likely continue, with many employers even announcing plans to let employees work from home permanently.
Self-reported data shows that not only are employees in support of this move, but they also welcome it. According to recent research by McKinsey, 80% of people questioned report that they enjoy working from home, 41% say that they are more productive when working from home, and 28% indicated that they are just as productive.
If you are part of the workforce that has transitioned to remote work either temporarily or more permanently, this move could have an impact on your taxes. Here are four important tax considerations when working remotely:
1. Income Taxes
If you work in the same state that you reside and file your taxes, then there is likely no tax implication for you. But if you are now working from home in a different state than where you were previously going to work (i.e. crossing state lines to get to your job), then you could have some new tax consequences to deal with.
Your federal income taxes won’t be impacted. However, for state taxes, income tax depends on where your remote office is based and where your employer is based, meaning there could be additional tax burdens.
Working or living in a state can result in what’s called “tax nexus.” The term “nexus” is used in tax law to describe when a business has a tax presence in a particular state. Nexus is basically a connection between the taxing authority and an entity that must collect or pay the tax.
For a business, having a physical presence is one of the key determinants for tax nexus. Having employees located in a state, even if they are working remotely, may result in tax nexus.
Several states have specifically indicated that the presence of a telecommuting employee who is not engaged in sales, has no contact with in-state customers, and whose home is not considered to be a place of business for the employer would still trigger the out-of-state employer income tax nexus in the state in which the employee is located.
In other words, the employee’s remote home could be treated as an office location, subjecting the employer to tax nexus in that state. Similarly, the employee could be subject to state income tax in the state they are remotely located.
This was an issue pre-COVID-19, but it will now likely become an even more hotly contested issue among states. Some states are granting COVID-19-related exceptions for a given period of time, while some states do not provide any such exceptions. However, with states starved for tax revenue dollars due to the pandemic, there will likely be an uptick in disputes over tax nexus in the near future.
2. Dual Residency
Most states define a “resident" as an individual who is in the state for a reason other than a temporary or transitory purpose. States consider a person’s “domicile" to be the permanent home to which he or she intends to return whenever absent from the state for a period of time.
The common threshold to determine residency is if you spend more than 183 days in the state. In other words, if you have resided in the state for more than 183 days, you may be deemed to be a Statutory Resident. For many that relocated to a different state due to COVID-19, that threshold may be coming up soon.
Why is this important? Crossing the 183-day threshold could result in a trap of dual residency and potentially dual taxation. Most states claim the right to tax an individual’s income if they are believed to be a resident and domiciled in that state. States may impose tax on 100% of a resident’s income from all sources, including portfolio income. The extent of taxation depends on the state’s income tax rules.
3. Changing Your State of Residency
Many might consider changing their state of residency if they relocated due to COVID-19. If that includes you, it is important to follow your state’s rules for changing residency. Generally, states do not deem that you have moved your domicile unless certain conditions are met to show your intent to change your domicile. This may include updating your voter registration, mailing address, vehicle registration, or driver’s license to your new domicile. Be sure to keep all documentation for changing your state of residency, as residency audits are on the rise.
If you find yourself working remotely in a state that’s different from your home state, you should check with your employer on withholding issues. Also, check with your financial planning professional or CPA, as state tax issues can get tricky depending on the circumstances and states involved.
4. Work-From-Home Deductions
Home Office Deduction
The Tax Cuts and Jobs Act (TCJA) suspended the home office deduction for W-2 employees for tax years 2018 to 2025.
The home office deduction is only available to self-employed people who use their home "regularly and exclusively" for business during the tax year. Regular and exclusive means you must regularly use part of your home solely for conducting business. For example, if you use an extra room to run your business, you can take a home office deduction for that extra room.
If you qualify, there are two methods for calculating the deduction: the simplified method and the actual method.
Under the simplified method, taxpayers can calculate the amount of their home office deduction by multiplying their business square footage by $5 per square foot, not to exceed 300 square feet.
Under the actual method, taxpayers can calculate the potential deductible amount by prorating their expenses with their business use.
Incurred Job-Related Expenses While Working From Home
From 2018 to 2025, the TCJA eliminated all miscellaneous itemized deductions subject to the 2% of adjusted gross income (AGI) limit, including the deduction for unreimbursed employee expenses.
However, check your employer’s reimbursement policy. The expense may be fully reimbursable, or employees may be able to trade a salary reduction for reimbursement of expenses. Salary is fully taxable, but the reimbursement is tax-free if you meet certain criteria.
Undoubtedly, the pandemic has upended our lives, including forcing many of us to make the transition to working remotely for the foreseeable future. If you’re one of these people, check with your financial planning professional for help with any state income tax or financial planning issues that may need to be addressed.
MBA, CFP® AIF®, CPA, Life & Health Insurance License Chris has more than 30 years of experience in the financial services industry in the areas of accounting and financial planning. He is well-versed in the financial challenges faced by most individuals. Chris has also authored articles on financial planning, divorce and the financial markets. In addition, for those going through divorce, has appeared as a subject matter expert on a number of media outlets, as well as presented...Read More