With the end of tax-filing season swiftly approaching, people who worked in multiple states last year due to Covid may be wondering — where do I owe taxes?
The answer might not be simple.
Between March 2020 and October 2020, nearly 9 million Americans relocated, according to research from the National Association of Realtors. As many as 42% of Americans worked remotely in 2020, and 71% were not aware that working remotely in other states could impact taxes owed, according to a November survey from the American Institute of CPAs conducted by the Harris Poll.
"The pandemic has certainly thrown a wrench into even what I would call the baseline rules of where you work and where you live," said Mark Steber, chief tax officer for Jackson Hewitt Tax Services.
Where you may owe
First and foremost, you owe taxes in your home state — generally where you live, vote and have a home or car registration.
"You have a general rule the taxpayer owes taxes where they live — their domicile state as it's called — and where they work," said Steber.
But that gets more complicated if someone works and earns income in one state but lives in another. You may have to file a return in another state if you earn money or work there, if it's where your company is located, you own property there or if you spend more than half the year there, according to Steber.
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Of course, some states have reciprocal agreements, meaning that you may be off the hook for taxes in more than one state depending on where you live and work.
"If the state you live in has a reciprocal agreement with the other state you worked in, then you wouldn't have to pay taxes in two states," said Lisa Greene-Lewis, a tax expert at TurboTax.
Remote work throws a wrench in taxes
This year, because so many people relocated and worked remotely due to the pandemic, things might be extra complicated.
Because of the pandemic, many states have issued new rules about "nexus" — a term describing a tax relationship between two entities — and remote work.
Basically, because so many people are working from different locations, some states have said that telecommuting does not trigger nexus in their state, meaning that people may not have a filing obligation there for 2020.
One such state is Connecticut, which said that if your job is in the state but you worked remotely from another location in 2020, you won't owe taxes in Connecticut.
But each state has made its own rules, and not all states have said that telecommuting doesn't impose nexus, meaning taxpayers should be extra careful to check where they may have an obligation to file this year. Some may owe taxes in more than one state depending on individual rules.
Check with your employer
Before you get started preparing your taxes, a good place to look to determine if you might have an obligation to file a tax return in any state other than where you currently live is your Form W-2, said Anjali Jariwala, certified financial planner, CPA and founder of FIT Advisors in Torrance, California.
"The W-2 will usually show your federal income, withholding, etc., and then towards the bottom it will also show your state wages and your state withholding" said Jariwala. "To the extent you were working in another state and your employer was withholding taxes for you in that state, you would notice it on the W-2."
The pandemic has certainly thrown a wrench into even what I would call the baseline rules of where you work and where you live
chief tax officer, Jackson Hewitt Tax Services
It also means that if you are thinking about moving, you should tell your employer, said Nancy DeRusso, managing director and head of financial wellness at Goldman Sachs Ayco Personal Financial Management.
"When employers withhold money for taxes, they will hold for federal taxes and state taxes," said DeRusso. "So if they need to change the state withholding, like you moved from New York to California, unless you tell your employer you've done that, they're not going to change the withholding."
People who are self-employed will have a different process, as there is no withholding. Generally, they'll only owe income taxes where they live, said Jariwala.
Get professional help
Of all years, this may be the one to get professional help ahead of the May 17 filing deadline, especially if you have a different situation because of the pandemic.
Having income and some withholding in a state doesn't necessarily mean you have a filing obligation, according to Jariwala. On the flip side, having any activity in a state, regardless of living there, may mean that you do need to file there.
People who have worked in multiple states especially due to remote work should check the rules in each state or consult a tax professional for help in filing. Failing to file taxes in a state where you should have may result in unexpected penalties for years to come.
"You don't have the benefit of the statute of limitations expiring," said Steber, referring to a federal rule that the IRS can't audit a taxpayer generally after three years unless they have committed a crime
This rule generally doesn't apply at the state level, meaning that if you fail to file taxes you may owe, the risk of getting audited and having to pay a hefty fine doesn't go away, according to Steber.
Don't pay twice
And, getting professional help to file your returns correctly can also keep you from overpaying taxes now.
If you do have to file income taxes in multiple states, you generally won't owe double taxes on income earned. Most home states will give taxpayers a credit for taxes paid in another state.
Still, some taxpayers might just file two state returns and pay in both states, said Steber. That might not be correct, and if they overpay a state, they might not get the money back, he said.
"I can promise you, if you send New York $5,000 and say 'I live in California,' they're going to keep that $5,000," said Steber.
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