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If you’ve been hunkering down in a different state due to Covid-19, your tax situation is about to get a little more complex.
The longer you stay away from your home base — particularly as we approach the sixth month of remote work for many people — the greater the chances you might have a tax obligation in your temporary abode.
“We are at a stage where most people who have temporarily relocated to another state and are working elsewhere have reached a point where they would owe taxes to that state,” said Jared Walczak, vice president of state projects at the Tax Foundation.
“In the early days, there were concerns and legit challenges around people spending a week with family,” he said. “But if you spent months working elsewhere, you have a tax obligation to that state.”
The situation is especially sticky for residents of high-tax states who have been waiting out the pandemic in a more tax-friendly location.
States’ coffers are bare due to declining revenue from sales and income taxes, so locales that need the money will pursue it.
“New York and California are prime examples where they will try to be aggressive about this to protect the income they’re used to getting,” said Kim Rueben, project director of the state and local finance initiative at the Tax Policy Center.
Indeed, as many as 1 in 5 American adults have either gone to a new location due to the pandemic or know someone who has, according to data from Pew Research Center. The group polled 9,654 individuals in June.
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People who work in one state but reside in another can wind up facing a tax liability in both locations.
States have different ways to reduce complexity for these individuals.
For instance, there can be reciprocity agreements between two or more locales – as is the case for New Jersey and Pennsylvania – to prevent income from being taxed twice.
States can also offer a tax credit to offset dual taxation. For instance, Connecticut offers residents a credit if they work in another state that levies their income.
Remote work amid coronavirus throws in another element for some workers. Seven states use a “convenience of the employer” rule, imposing a tax on employees based on their employer’s location, according to the Tax Foundation.
Those states are Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York and Pennsylvania.
Taxpayers who earn money in a state where they don’t reside may also be responsible for non-resident tax returns there.
“It’s not uncommon to file multiple tax returns for some of these states with reciprocal agreements,” said Rueben of the Tax Policy Center.
More than half the year
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People who are spending time in another state need to be aware of residency rules.
Generally, states apply two tests to figure this out.
In order to be a statutory resident — and to be taxed as a resident of a given state — you must have spent at least 183 days there during the year and you must maintain a permanent place of abode there.
The other test is one of domicile. Domicile is based on five factors, according to Mark Klein, tax attorney and partner at Hodgson Russ in New York.
The factors are your true home base, the location of your business, the amount of time you spend in that state, the location of your cherished possessions and where your family resides.
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Complexity arises when residents spend more than half of the year in another state, even if they are domiciled somewhere else. Have they lived long enough in the temporary location to warrant paying taxes there?
“You can have people who don’t intend to permanently move away from a different state, but might spend seven or eight months elsewhere,” said Walczak. “This can create challenges in determining where they’re domiciled.”
In that case, two states may claim they’re entitled to their share of taxes, he said.
If you’re bouncing from one state to another amid the pandemic, it doesn’t hurt to call your tax professional and start thinking about how filing next year might look.
“You could be a part-year resident in multiple states or a non-resident earner in multiple states,” said Rueben of the Tax Policy Center.
It’s also helpful to keep track of where you’ve been and how long you’ve been working remotely from your beach house or from your parents’ cabin.
“Be aware of the potential liability you’re accruing,” said Walczak at the Tax Foundation. “If you spent significant time working elsewhere, they will expect you to pay income taxes.”