If you spent part of your 2020 quarantine working remotely out of state, you (or your business entity) could be surprised with state taxes.
A recent poll found that more than half of Americans who worked remotely during the pandemic aren’t aware of the possible tax consequences once they crossed state lines. Each state has its own tax laws related to remote working. The number of days worked out of the state where a taxpayer’s physical workplace is located may also impact the amount of state taxes owed.
For instance, in Illinois, you may be subject to state income tax withholding after working in the state for more than 30 days. A majority of states have stricter rules. In Montana, Colorado, Louisiana, Michigan, New York and others, income tax withholding kicks in on the very first day a taxpayer works within the state. That’s a big tax blow for Texans, who aren’t used to state income taxes at all.
For your upcoming income tax filing, the American Institute of CPAs (AICPA) recommends compiling a list of any states you’ve worked remotely in during 2020 and calculate the approximate number of days worked in each state. Depending on the state, income taxes may also be levied by cities, counties, municipalities, school districts or other jurisdictions. Make sure you also track this level of detail, the AICPA adds. That way, your CPA can help you determine your full tax liability and whether you will owe state or local income tax (including interest and penalties) in those other locations.
Be aware, also, that some business expense deductions you once took for granted could be unavailable this year thanks to working from home. And if you worked remotely at a rental property you own (and usually rent), you may be on the hook for taxes that are usually deducted from that property. Feel free to contact us with questions.