Cross-state Residency Tax Considerations in 2020: The Impact of COVID-19 Work From Home

Guidance from states on how they are going to collect tax revenue from part-time residents for the 2020 tax year has been inconsistent. Some have been proactive in offering direction, while others have remained quiet, leaving taxpayers in limbo. We’ve outlined some of the major updates  and actions you should be taking to make sure you’re keeping accurate records and aren’t unintentionally triggering additional tax payments.

Each situation is unique, and there are many complexities based on your particular income, marital status, permanent/temporary states of residence, and even your health situation that could affect your taxes this year, so we highly recommend you work with a tax advisor for your personal tax situation in addition to reading up on the general context we provide below.

How is state residency for tax purposes determined normally? Additional complexities: Filing quarterly, married individuals

Residency rules are impacted by a number of factors. The most common factor is the amount of time spent in a state. For example, New York and Maryland have set a threshold of 183 days, or half the year, to determine residency. Other factors, based on the state, typically include:

1. Location of employment
2. The state in which the taxpayer is registered to vote
3. The state of issuance of a driver’s license or other permit

If you normally file quarterly, you’ll have to be extra conscious of what your residency status is for each quarter, and subsequently for which state(s) you will have to file, as it may differ from quarter to quarter.

Additional complications can arise for married individuals filing together if the couple works and lives in different states. For example, if a spouse spent a significant amount of time working for a company based in a state other than the one he or she lives in with their partner, the couple can file a joint federal tax return, but separate state tax returns.

Further reading from Harness Tax firm Baker Tilly here: Dual State Residency Can Result in Dual Taxation

If you’re newly working in a different state (or multiple different states) in 2020

Even during a “normal” year, many professionals commute to another state for work. Working from home, a family home, second home, or vacation home during the pandemic has raised the question of which state then gets to tax that income.

Be sure to take meticulous records of your activity/dates, particularly the date you started working from home, and (if relevant) when that arrangement changed. Because many companies are offering flexible and part-time in-office work as an option, it’s not quite so black and white, and detailed records are key. Include credit card statements, transportation/flight records, and anything that will definitively show where you were located on a given day.

While states are still updating their policies, below is what we know so far:

States that have agreed not to enforce their tax rules for remote workers who are present due to Coronavirus: MN, NE, IL, IN, MS, AL, GA, SC, DC, MD, PA, NJ, RI, MA

States that have not yet announced their policy: ID MT, ND, OR, UT, CA, AZ, CO, NM, KS, AR, OK, LA, HI, NC, KY, MO, WV, VA, DE, IA, OH, WI, MI, NY, CT, VT, ME

States that don’t have income tax on wages: WA, WY, NV, TX, SD, FL, NH

Note: To be able to offer a state by state comparison in the table below, it uses individual income “tax burden” as a reference point. This is distinct from “tax rate”, which varies widely based on an individual’s circumstances. Tax burden measures the proportion of total personal income that residents pay toward state and local taxes.

Source of data and more information on methodology from WalletHub.

As with many things this year, a lot is still to be determined — “due to Coronavirus” could be interpreted in several ways (Personally ill from Coronavirus? Family member is ill? Not ill, but at risk?), and next year’s filings will certainly require a lot of states to provide further guidance around exactly what factors they’ll consider for enforcement.

In addition to Coronavirus-specific policies, individuals must take into account other cross-state factors. For instance, about 15 states have reciprocity agreements with neighboring states, which allow commuters to file and pay taxes where they live instead of where they work.

How does this affect my state tax exposure for 2020? My withholding obligations?

Given these complications, the potential tax exposure for 2020 is particularly complex, with a myriad of factors, including: amount of time spent in each state (known), state specific reciprocity rules (unknown), and state specific residency requirements/thresholds (unknown).

All these factors have significant tax implications. For example, a worker that moves from San Francisco to Washington for an extended period of time as a result of COVID-19 may be able to avoid paying California’s high income taxes for the period of time they are in Washington. In such a scenario, the individual would file in both states, but only pay taxes on the portion of income associated with California, since Washington has no state income tax.

Withholding obligations also become more complicated. States are taking different approaches regarding withholding obligations. For instance, New Jersey and Mississippi changed their withholding policies, allowing businesses to retain the same withholding for employees’ temporary pandemic-related “work from home” location.

Alternatively, states like Minnesota and Maryland have indicated that work from home policies may create new withholding obligations. For example, businesses that may need to change their withholding to reflect employees’ new states of residence as their place of work. Nothing official or definitive yet, unfortunately.

Considerations for business owners

Business owners with employees have additional complications and regulations. For example, a business owner that has an employee in another state, other than the state the business is normally based in, could trigger rules that raise state taxes on the business income. Such “Nexus Rules” vary state by state.

Read more about this from Harness Wealth tax firm Withum here: Considering a Possible Business Relocation

Considerations for longer term planning: Moving permanently

With many companies becoming more flexible with their work from home policies, some taxpayers may seriously be considering relocating permanently, particularly away from high cost of living metros.

Internationally: US citizens and resident aliens are subject to federal income tax on worldwide income, meaning you still have to pay federal income taxes if you live abroad. If you are considering moving internationally and are a US citizen, see if you can qualify for Foreign Earned Income Exclusion (FEIE), which lets qualified taxpayers exclude up to $101,300 from their taxable income. Individuals can qualify for the FEIE if they establish a “tax home” in another country and if they satisfy the “Bona Fide Residence Test” or the “Physical Presence Test”. You can find more details on the FEIE from the IRS here

Domestically: If you are considering moving to a different state permanently, make sure to understand their residency requirements, tax rates relative to your current residence, and state specific requirements, such as reciprocity rules as noted above.

If you’re staying put in your usual residence, and your residence is located in the same state of your place of employment, there’s not much to take in to account for tax purposes, even in 2020. However, any additional layer of complexity regarding a temporary change of residence, business ownership, multiple moves, discrepancies within one household, etc. require that you be conscious of any additional tax burden you may be accumulating and responsible for keeping accurate records.

Create a profile with Harness Wealth to find a tax firm that’s suited to your personal needs. An experienced CPA can keep you up to date on new regulations as they are announced, and ensure you’re managing your tax situation effectively.

Sources and further reading:

• Remote Working from a Different State? Beware of a Tax Surprise (Wall Street Journal)
• Foreign Earned Income Exclusion (IRS.gov)
• Paying Taxes While Living Abroad (The Points Guy)