Wealth Planning, Income Taxes, COVID-19, Pandemic - Aspiriant

Working in a Different State? Know Your Tax Liability

COVID-19 brought unexpected challenges and changes in the way we live and work. Many of us now work primarily from home. Others have chosen to work from a vacation home or move in with parents to care for each other. If that temporary working situation has you in another state, even if for just one day, you may have to file tax returns in multiple states and you could end up paying more in state income taxes.

Tax rules vary depending on the state, so you should know what the rules are for the state where your work office is, where you live and where you’ve been working lately. Here are some basic things you should be aware of and discuss with your wealth manager or tax advisor before filing your taxes.

Employers should be keeping track

First, know that employers in most states are required to withhold income tax in the state(s) in which an employee provides services. Illinois, Nebraska, Rhode Island and South Carolina, however, will waive employer penalties for failure to withhold where the sole reason for state withholding is working from home due to the pandemic.

If your employer has been aware of you working in another state, expect your W-2 to report withholding paid to more than one state. Even if it doesn’t, you could still be on the hook for paying the non-resident state tax.

How could this affect you?

Depending on where you live and where you actually performed your work, you could pay more in state income taxes.

To start with, most states will tax 100% of your income if you live there. On your tax returns, you will receive a credit in your resident state for the tax you paid to other states. However, seven states — Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming — do not charge income tax.

That means if the visiting state has a lower tax rate than your resident state, your net income tax bill should remain the same. For example, if you live in California, one of the highest tax states, but worked in New Mexico, you’ll want to claim a California credit for the tax you paid to New Mexico.

On the other hand, you may be required to pay more tax than you usually did pre-COVID. If you live in Florida, where income is not taxed, but worked part of the year in Atlanta, you’ll probably need to file a nonresident income tax return in Georgia.

Because of the temporary nature of pandemic-period location changes, don’t expect remote working in a cheaper tax state to change your residency status. Even if you own property in a second state, your primary residency state probably won’t let you leave so easily.

Some states have reciprocal agreements to not tax each other’s residents for services performed in the nonresident state. On the other hand, Massachusetts and New York, two states where more people work than live, have indicated they will continue to tax nonresidents who no longer commute to their state due to the pandemic, as if they still work in their state. With billions of tax dollars at stake, New Hampshire has petitioned the U.S. Supreme Court to challenge the Massachusetts plan. The decision should impact the entire country.

What Should You Do?

Nobody wants to pay more tax than they’re required to. Likewise, you don’t want a surprise audit or unexpected tax bill. So communicate your temporary work location changes to your employer and monitor your state tax withholdings. In addition, keep track of the time you spent working in temporary, nonresident state locations.

Most importantly, get help. The rules are complex, and if you’ve been working in multiple states, you’ll appreciate the expert guidance of a wealth manager or tax advisor.