As states went on lockdown and businesses closed last spring due to the coronavirus, millions of Americans made the shift to working from home.
Converting dining tables to desks, working from the comfort of a vacation home, or moving across state lines, few considered how working outside the office would impact their taxes.
After all, we had just entered a pandemic.
The Elephant in the Room
Fast-forward six months or so.
Major companies like Facebook and Google are announcing work-from-home policies through mid-2021, and other businesses will likely follow suit.
Clearly, remote work is here to stay for the foreseeable future.
It’s time to address taxes in the era of remote work.
The Deduction Dilemma
While remote workers may be spending less on gas, public transportation, parking, and dry cleaning, other work-related costs may be on the rise.
Ergonomic office furniture, internet connectivity, additional computer monitors, and even keeping a home office at a comfortable temperature seem like expenses that should warrant a federal tax deduction.
But they don’t.
Prior to the 2018 Tax Cuts and Jobs Act, employees could claim a federal deduction for unreimbursed job-related expenses exceeding 2% of adjusted gross income.
Today, however, individuals and couples receive higher standard deductions ($12,400 and $24,800, respectively), without having to itemize.
But there’s a bright spot: While the IRS disallows these write-offs, seven states—Alabama, Arkansas, California, Hawaii, Minnesota, New York, and Pennsylvania—currently allow them when total deductions exceed the state’s standard deduction.
Snowbirds, Take Note
As winter approaches, it may be tempting to seek a warmer climate in which to work remotely. But before temporarily relocating to another state, do your homework.
While state income tax withholding is generally required in the state in which an employee works, not all neighboring states have reciprocal tax agreements, which allow residents of another state to work in but not pay income taxes on wages earned in the non-resident state.
For example, Oregon residents who decide to spend the winter working from Arizona will not be taxed by Arizona on income. That’s because a reciprocal tax agreement exists between the two states.
To claim this exemption, workers must first file Form WEC, a Withholding Exemption Certificate, with their employer.
Additional Tax Considerations
While 13 states, plus the District of Columbia, will not subject visiting workers to income tax, other states are not so generous.
California, for instance, is notorious for pursuing income tax revenue from visiting workers, even those there for a short time.
In our own backyard, Washington residents no longer commuting to Oregon can now forego paying Oregon income tax on the portion of remote work performed in Washington.
And remember: For some remote workers, temporarily working from a lower- or no-tax state could provide a tax benefit.
Our Best Advice
To prevent an unpleasant surprise next April, get to know payroll withholding and income tax rules in your state of residence—and in the state in which you work or plan to work.
Keep diligent records of days spent working outside your home state. Log where and when you’ve worked, even down to the hour.
And don’t hesitate to contact Vista or your tax professional with questions.