Telecommuting can trigger an extra tax return

Q: During the pandemic, I temporarily set up quarters in another state so I couldwork in a less populated area. NowI heard that Imight owe taxes in both states. Can that be true?

A: Yes. If you telecommuted during the pandemic, you could be required to file more than one state tax return next spring — and you could end up with a higher tax bill, too.

Most states that impose an income tax require people to pay taxes on income earned while they were working in their jurisdictions— in some cases, for as little as one day. That means if you moved out of state for a few months during the pandemic— to a family member’s home in a rural area, for example— you may have to file a tax return for that state. There’s a good chance you’ll get a credit fromyour home state for taxes paid to the state in which you decamped, but it makes the task of filing your returns more complex, says Jared Walczak, vice president of state tax projects at the Tax Foundation.

A separate problem awaits some teleworkers whose home is located in a different state than their employer. Six states (Arkansas, Connecticut, Delaware, Nebraska, New York and Pennsylvania) have some version of a “convenience rule” that requires workers to pay state taxes if their employer is located in those states, even if the worker lives and works elsewhere— unless their employer requires them to telecommute. If you live in a state that doesn’t offer a credit for taxes paid to another state, you could end up paying double taxes on the same income.

“A lot of people working from home will be very surprised to be hit by two separate state income taxes,” Walczak says.

Legislation has been introduced in Congress thatwould limit states’ ability to tax nonresidents, and it has bipartisan support. But in the meantime, if you worked in more than one state last year or telecommuted for a company located elsewhere, keep a record of where and when you worked, says Eileen Sheer, seniormanager for the American Institute of Certified Public Accountants. Make sure your employer knows where you worked during the year so it can adjust your with holding if necessary, she says.