For the many people working remotely during the pandemic, next year’s tax season could get complicated if they’re sheltering in place in a different state.
That’s because some states tax income earned there even if the person primarily resides and works in a different state. For example, if you live in Virginia but are working remotely from a family home in New York this summer, you may have to pay income tax to both states.
But it all depends on where you are relocating. In some places, workers could owe taxes to their temporary state after just one day of work. Other places would tax only after a 30-day stay. Often, a taxpayer gets a credit from their home state for taxes paid to another, but it doesn’t always make them whole.
Some, like Pennsylvania and New Jersey, already have reciprocity agreements because so many people typically commute from one to the other.
Thirteen states and the District of Columbia have addressed the 2020-specific situation. They’ve said they won’t tax workers who’ve relocated there temporarily due to the pandemic, according to the American Institute of CPAs. Instead, those people will pay taxes to the state where their employer is located, like normal. But even those policies can vary by state when it comes to how long the exemption is in effect.
“Some people may end up paying more. Some will end up paying a little less, and some will break even. But it can be a huge headache even when there’s not a big impact on your bank account,” said Nathan Rigney, lead tax analyst at The Tax Institute at H&R Block.
In normal times, your employer will report the states where you worked on your W-2 and withhold wages accordingly. But that might not happen this year. It could be up to the taxpayer themselves to reallocate their wages by state.
Even if employers don’t ask where you’ve been working, states’ tax departments have other ways of finding out where you’ve been, like if you have a mailing address there, Rigney said. Tax preparers will likely ask when you go to file next year.
There could be consequences, including a small underpayment penalty, if a taxpayer fails to withhold or make estimated payments throughout the year, Rigney added. They could also face a bigger penalty if they fail to file a non-resident income tax return in the state next year.
Still, it’s possible Congress could step in and create a nationwide standard. Republicans in the Senate included a provision in their broader stimulus proposal that says remote workers would only owe taxes in their temporary state if they stayed there for more than 90 days during 2020. After 2020, it would set a 30-day threshold. But lawmakers have yet to strike a deal on a final piece of legislation.
Previous, similar proposals have had bipartisan support. Prior to the pandemic, South Dakota Republican Sen. John Thune and Ohio Democratic Sen. Sherrod Brown introduced a bill that would have created a 30-day standard.
While a federal change would provide tax relief for workers, it could hurt states’ revenue at a time when many are facing severe budget shortfalls. Some cities, which levy their own income tax, could be impacted, too.
New York Gov. Andrew Cuomo, a Democrat, said last week that the federal proposal would “have a very negative effect on New York City,” where many people work but don’t live. Plus, many of its high-earners left during the pandemic, fleeing to places such as the Hamptons, the Hudson Valley and elsewhere around the country.
Earlier in the year, Cuomo suggested that emergency health care workers, who traveled from out of state to help out New York’s hospitals as coronavirus cases climbed, would be subject to New York income tax for the time they worked there, unless the federal government offered more financial support.
CNN’s Kristina Sgueglia contributed to this report.