Working remotely from “out of state” can be taxing – Income Tax

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The COVID-19 pandemic has forced many people to work remotely, either from home or from a temporary location. One potential consequence of working remotely may surprise you: an increase in your tax bill.

During the pandemic, it’s been quite common for people to work remotely from another state — across state lines from the employer’s place of business or even across the country. If this describes your situation, you may have to file tax returns in both states, which could result in additional state taxes. But the outcome depends on the applicable law, which varies from state to state.

Beware of 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, have your “true fixed permanent residence” there – the state has the power to tax your worldwide income. A state may also tax your income if you are a “resident”. Usually this means that you have accommodation in the state and spend minimal time there.

It is possible to be domiciled in one state but resident in another, which may require you to pay taxes to both states on the same income. Many states provide relief from this double taxation by providing credits for taxes paid to other states. But it’s still possible that working remotely could 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 are working remotely. from a state with an income tax.

A state may also be able to tax your income if it comes from a source within the state, even if you are not resident or domiciled. Several states have “convenience rules”: if you are employed by an organization in the state, but you live and work in another state for your convenience (and not because the job requires it), then you must income tax to the state where the employer is based.

If this happens, you may also owe taxes to the state where you reside, which may or may not be reduced by tax credits paid to the other state. Some states have agreed not to impose their taxes on remote workers who are present in their state due to the pandemic. But in many other states there is a risk of double taxation.

Know your options

If you worked remotely from out of state in 2021, consult your ORBA tax advisor to determine if you are liable for taxes in multiple states. If so, ask if there are any steps you can take to lessen the blow.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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