Many people are still confused about how to handle last year’s tax changes and are grateful for the delayed 2020 tax deadline. So how and why should they start to plan now for their 2021 taxes? Looking at this early is vital, especially for people who have been working remotely — and who plan to continue.
According to Pew Research Center, 71% of employed Americans whose jobs could be done remotely were working from home in October, compared to 20% immediately before the pandemic took hold. Remote working is catching many tax filers by surprise this year, with many unaware of the impact on their taxes when it comes to where they physically work. The widespread closures of many workplaces in 2020 meant that many employees who normally commute to work in a different state than their residence spent most of last year working from home. For others, the opportunity to work remotely led to them moving back home with family — and home is in a different state. And others who found themselves working from a home office might have expected to deduct work-from-home expenses.
And if home could be anywhere, that could have important tax consequences if workers haven’t taken state telecommuting laws into consideration when deciding where to go and how long to stay.
If you’re already working remotely, planning on continuing to do so or just starting, here are a few important things to consider, bearing in mind that every taxpayer’s situation is different, and you should consult a tax advisor on your specifics.
Working Full-Time Across State Lines
You may have decided that moving in with family in a state with lower income tax rates will save money, but your employer in a state with a higher tax rate might disagree. If you work remotely full time in a different state than your employer, you may have to file in two states: a nonresident return for the state where you work and a resident return where you live. Most states offer credits for taxes paid to the nonresident state or establish reciprocity agreements so employees can ask their company for a withholding exemption from their nonresident state. Keep in mind that your employer might need to withhold taxes for your resident state, but at least you won’t need to file and pay taxes in both places.
Dual Residency
Dual state filing is complex, leaving people confused not only about how to file in multiple states, but also about how to make sure they are doing so coherently when it comes to offsetting the right credits. If you split the year between different states, it’s important to check how long you can work in each location before triggering a filing requirement for an extra return.
Changing Your State Of Residency
Don’t just move but prove your new residency. Some states look at your voter registration, vehicle registration, driver’s license or other documents as evidence that your new home truly is your primary residence. Proving you live and work in the same state will make it clear to the tax authorities that your only filing requirement is local.
Work-From-Home Employee Deductions
Independent contractors and gig workers can deduct some work-from-home expenses, but employees cannot. You may be able to negotiate with your employer to cover some typical office expenses on your behalf so you save money now, and they’ll be able to take a deduction next April (though this will vary for each employer).
Home Business Deductions
As mentioned, self-employed workers can treat their home as a place of business to deduct expenses. But even for the self-employed, the deduction rules are stringent. The IRS looks for regular and exclusively work-related use of the items, utilities and space you want to deduct, and these deductions only apply to your principal place of business — so a restaurant owner who does paperwork at home can deduct expenses at the restaurant, but not at the house.
Plan Ahead
It’s not too early to start preparing for your 2021 taxes, starting with these simple steps:
• Understand the tax rules for the state — or states — where you live and work.
• If you work in a different state than where you live, be sure to keep good records of your workdays and locations.
• Review and update your state withholding with your employer as required to make sure your withholding is correct before you file.
• Don’t be afraid to seek professional help. Professional tax preparers can cut through the confusion this year and can also help you understand what will impact taxes for 2021.
The substantial increase in remote working that took hold in 2020 caught employers, employees and state tax authorities by surprise. By planning ahead now, you can mitigate unpleasant surprises for your 2021 tax filing. Keep your eye out for tax law changes, including the American Rescue Packagesigned in March, and watch as states adjust their legislation to generate needed revenue while easing the administrative burden for workers — remote or not. By taking a few steps now, you can avoid finding yourself wishing for another deadline extension next April.
This article originally appeared on Forbes.
