Worked in different states because of Covid? What you should know about filing taxes
With the end of the tax filing season fast approaching, people who have worked in multiple states in the past year due to Covid may be wondering: Where do I owe taxes?
The answer may not be easy.
According to research by the National Association of Realtors, nearly 9 million Americans moved between March 2020 and October 2020. Up to 42% of Americans worked remotely in 2020, and 71% were unaware that working remotely in other states could affect taxes owed. These were the findings of a November survey by the American Institute of CPAs conducted by Harris Poll.
“The pandemic has certainly thrown a wrench into the ground rules of where you work and where you live,” said Mark Steber, chief tax officer of Jackson Hewitt Tax Services.
Where you can owe something
First and foremost, you owe taxes in your home state – usually where you live, choose, and have a house or car label.
“You have a general rule according to which the taxpayer owes taxes, where he lives – what his name is – and where he works,” said Steber.
However, this becomes more complicated when someone works and earns income in one state but lives in another. According to Steber, if you make money or work there, if your business is located there, if you own property there, or if you spend more than half a year there, you may have to file a return in another state.
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Of course, some states have reciprocal agreements, which means you may have to pay taxes in more than one state, depending on where you live and work.
“If the state you live in has a reciprocal arrangement with the other state you worked in, you wouldn’t have to pay taxes in two states,” said Lisa Greene-Lewis, a tax expert at TurboTax.
Remote work throws a wrench into the taxes
This year things could be especially complicated as so many people have moved and worked remotely due to the pandemic.
Because of the pandemic, many states have introduced new rules for “nexus” – a term used to describe a tax relationship between two companies – and remote work.
Basically because so many people work from different locations, some states have said that teleworking is unrelated in their state, which means that people there may not have a 2020 registration requirement.
One such state is Connecticut, which states that if your job is in the state, you owe no taxes in Connecticut but you worked remotely from another location in 2020.
But every state has its own set of rules, and not all states have said that teleworking is unrelated, which means taxpayers should be extra careful about where they might be required to file applications this year. Some may owe taxes in more than one state, depending on each rule.
Check with your employer
Before you start preparing your taxes, be sure to check your Form W-2 to see if you may be required to file a tax return in a state other than your current place of residence, said Anjali Jariwala, certified financial planner. CPA and founder of FIT Advisors in Torrance, California.
“The W-2 usually shows your federal income, your withholding tax, etc., and then shows your state wages and your state withholding tax down as well,” Jariwala said. “To the extent that you worked in another state and your employer withheld taxes for you in that state, you would notice it on the W-2.”
The pandemic has certainly thrown a wrench into what I would call ground rules for where you work and where you live
Chief Tax Officer of Jackson Hewitt Tax Services
If you’re considering moving, make sure to let your employer know, too, said Nancy DeRusso, general manager and head of financial wellness at Goldman Sachs Ayco Personal Financial Management.
“When employers withhold money for taxes, they are withheld for federal taxes and state taxes,” DeRusso said. “So if you have to change the state withholding tax like you moved from New York to California, you won’t change the withholding tax unless you tell your employer you did.”
The self-employed have a different process as there is no withholding tax. Generally, they only owe income taxes where they live, Jariwala said.
Get professional help
Of all years, this can be the one who gets professional help before the registration deadline on May 17th, especially if you have a different situation due to the pandemic.
Having an income and some withholding in a state does not necessarily mean that you have a registration requirement, according to Jariwala. On the other hand, having activity in any state, whether or not you live there, may mean that you have to file there.
Individuals who have worked in multiple states, especially for remote work, should review the rules in each state or contact a tax advisor for help with filing. Failure to file taxes in a state where you should have levied taxes could result in unexpected penalties in the years to come.
“They don’t have the benefit of the statute of limitations expiring,” Steber said, referring to a federal rule that the IRS generally can’t audit a taxpayer after three years unless they’ve committed a crime
This rule does not generally apply at the state level. So if you don’t file taxes that you might owe, the risk of being audited and paying a hefty fine won’t go away, according to Steber.
Don’t pay twice
If you get professional help to submit your returns correctly, you will no longer be able to pay taxes.
In general, if you are required to file income taxes in multiple states, you don’t owe double taxes on earned income. Most home states give taxpayers credit for taxes paid in another state.
Still, some taxpayers could only file two state returns and pay in both states, Steber said. That might not be right, and if they overpay a state they might not get the money back, he said.
“I can promise you if you send $ 5,000 to New York and say I live in California, you will keep that $ 5,000,” said Steber.
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