The COVID-19 pandemic has required many people to work remotely, either from home or a temporary location. One potential consequence of remote work may surprise you: An increase in your state tax bill.
During the pandemic, it has been fairly common for people to work remotely from another state — across state lines from the employer’s place of business or even across the nation. If that describes your situation, you may need to file tax returns in both states, potentially triggering additional state taxes. But the outcome depends on applicable law, which varies from state to state.
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Watch out for double taxation
Generally, a state’s power to tax a person’s income is based on concepts such as domicile and residence. If you are domiciled in a state — that is, you have your “true, fixed permanent home” there — the state has the power to tax your worldwide income. A state may also tax your income if you are a “resident.” Usually, that means you have a dwelling in the state and spend a minimum amount of time there.
It is possible to be domiciled in one state but a resident of another, which may require you to pay taxes to both states on the same income. Many states offer relief from such double taxation by providing credits for taxes paid to other states. But it is still possible for remote work to result in higher taxes — for example, if the state where your employer is based and where you usually live has no income tax, but you work remotely from a state with an income tax.
A state also may be able to tax your income if it is derived from a source within the state, even if you are not a resident or domiciliary. Several states have so-called “convenience rules:” If you are employed by an organization in the state, but live and work in another state for your convenience (not because the job requires it), then you owe income tax to the state where the employer is based.
If that happens, you may also owe tax to the state where you reside, which may or may not be reduced by credits for taxes paid to the other state. Some states have agreed not to impose their taxes on remote workers who are present in their state as a result of the pandemic. But in many other states, there is a risk of double taxation.
Know your options
If you have worked remotely from out of state in 2021, consult your ORBA tax advisor to determine whether you are liable for taxes in multiple states. If so, ask if there are steps you can take to soften the blow.
For more information, contact Dan Newman at [email protected] or call him at 312.670.7444. Visit ORBA.com to learn more about our Wealth Management Services.