How Working from Home May Change Your Taxes

A large number of public, frontline, and essential workers continued to work on-site in 2020 during the pandemic. With stay-at-home orders in place, many workers also stopped going into the office last year and instead set up a home office — maybe even in a different state — to work remotely.

Now with tax season here, you might wonder if there are any deductions or other tax consequences for having worked remotely in 2020. Here's what you need to know:

Home office deduction. If you've been working out of an office set up in your house or apartment, does that qualify you for the home office tax deduction?

It depends on your employment status. If you're an employee, the answer is "no." (A 2017 tax law eliminated a deduction that permitted employees to deduct unreimbursed business expenses, including a home office.)

But you may be able to deduct your home office if you are self-employed or have a side gig. To qualify, you must use part of your home exclusively and regularly as your principal place of business. See IRS Publication 587 for more information on requirements for the home office deduction.

Taxpayers who qualify have two ways to calculate the deduction:

  • The simplified method is to deduct $5 per square foot of space used for business, with a maximum deduction of $1,500.
  • With the actual expense option, you multiply your home expenses, such as your mortgage, rent, insurance or utilities, by the percentage of your home that's used for business.

The two-state conundrum. The pandemic prompted some workers to move in with family living states away or to relocate to a distant second home. If you worked in a state where you don't legally reside, you could owe income taxes to that state on the money you earned while working there — sometimes even if it was just for a day. That means filing two state tax returns. (Most states give their residents a credit for income taxes they paid on earnings to another state, which avoids double taxation.)

Some states have reciprocal agreements with neighboring states so that employees who work in, say, Washington, D.C., but live in Maryland or Virginia, will only pay income taxes in the state where they reside.

However, seven states — Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York, and Pennsylvania — have a "convenience rule." That allows the state to tax workers based on where their employer's office is located — even if they don't step foot in it — if the employees are teleworking out of convenience rather than because their job requires it. It's unclear whether these states will make some concessions because of the pandemic, according to the Tax Foundation.

Ultimately, whether you'll have to file more than one state tax return for 2020 will be based on which states you worked in and the number of days you worked in each. This is one filing season when even do-it-yourselfers might want to consult with a tax professional to review their own personal situation.

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