Before the COVID-19 crisis, many people worked remotely by choice. Now, countless workers are performing their jobs from home or other off-site locations involuntarily -- whether because it's unsafe to go into an office, there are few child care options, or both. Some workers are thriving in a remote environment, while others are still struggling to adjust months later.
Even if you've managed to get the hang of working remotely, though, you may be in for an unpleasant surprise: owing taxes to another state.
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Will you owe income tax to more than one state?
Some states don't have an income tax, but most require residents to file a state income tax return each year. Changing work arrangements due to the pandemic could end up obligating you to pay taxes in more than one state.
How? Say you normally live and work in one state, but decided to relocate to another state for a couple of months during the pandemic and work remotely from there. You may be liable for income taxes in that second state. In some cases, you may have to pay taxes to a second state even if you only worked there on a remote basis for a handful of days. In other states, you may be able to work remotely for a longer period of time -- say, 30 days -- without incurring a tax liability.
So what happens when you owe income taxes to multiple states? You'll generally get a credit from your home state to offset the taxes you need to pay to a second state. You won't necessarily avoid losing some money, though, as different states have different tax rates.
Exceptions apply
Working remotely across state lines doesn't always present a major headache. Several states have reciprocity agreements that allow residents of one state to work in another (often nearby) state without having to file a state tax return there. For example, New Jersey and Pennsylvania have such an arrangement in place so that commuters between the two don't have to file a second state income tax return. Some states, like Illinois and Indiana, have reciprocity with more than one other state.
What you can do
If you've found yourself working remotely from a different state this year, it pays to consult a tax professional and see what implications that might have. In some circumstances, your tax burden may not increase by much. But you should still gear up for the possibility that you may owe more than usual -- and plan for that accordingly.
