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Working Remotely From Out of State Can Be “Taxing”

The COVID-19 pandemic has required many people to work remotely, either from home or a temporary location. And with increasing frequency, these arrangements involve out-of-state telecommuting (working across state lines from your employer’s place of business). While this has opened unprecedented opportunities for workers, it also leads to one potentially expensive consequence of working out of state: an increase in state tax obligations.

The most common pitfall in a multi-state work setup is double taxation. This is when the same income is taxed twice. If you work in a different state from your employer, you may need to file tax returns in both states — potentially triggering additional state taxes. But the outcome depends on applicable law, which varies from state to state.

Generally, a state’s power to tax a person’s income is based on concepts such as domicile and residence. If you’re domiciled in a state (your “true, fixed permanent home” is there), that state has the power to tax your income from wherever it’s earned.

However, a state also might tax your income if you have a dwelling in the state and spend a minimum amount of time there. This can mean you’re considered a resident of that state as well — even though you don’t live there full time. And this may require you to pay taxes to both states on the same income.

For example, the state where your employer is based (and where you usually live) has no income tax. However, you work remotely from a vacation home out of state where you spend a significant chunk of time each year. If that second state levies its own income tax, you could be responsible for paying it.

A state also may be able to tax your income if it’s derived from a source within the state, even if you aren’t a resident or domiciliary. Several states have so-called convenience rules: If you’re employed by an organization in the state, but live and work out of state for your convenience (not because the job requires it), then you owe income tax to the state where the employer is based. If that happens, you also may owe tax to the state where you reside.

Many states offer relief from such double taxation by providing credits for taxes paid to other states. This could include credits for taxes paid to the other state. Some states have agreed not to impose their taxes on remote workers who are present in their state as a result of the pandemic. But in many other states there’s a risk of double taxation.

If you’ve worked remotely from out of state in 2021, consult your tax advisor to determine whether you’re liable for taxes in both states. Not only can they accurately answer the question, they’ll also know the steps you can take to soften the blow.

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