The rise in remote work after the pandemic has made working in rarer or less expensive states a reality for many Americans.
However, the recent boom in the “work from anywhere'' and “digital nomad'' culture could have harsh and unexpected consequences as tax season approaches.
If you work in a different location than where you live, you may have to file income tax returns in both states, putting you at risk of being taxed twice on your income.
Incredibly, some states, such as New York, allow you to work from other locations, such as your home near Jersey or the beaches of Miami, even though your employer is based there. If you choose, you may be required to pay taxes. We'll talk more about this strangely titled “employer convenience” rule later.
But it's not all bad news. Some states have reciprocity agreements with neighboring states, while others have no income tax at all.
But the recent boom in the “work from anywhere” or “digital nomad” culture could have unintended consequences as tax season approaches.
This rule has been around for a while, but now that remote working has become so commonplace, it's becoming more problematic as Americans take advantage of that benefit not only by working from home but also from other locations. , say tax experts.
Here's everything you need to know to avoid getting caught if you work across state lines in the 2023 tax year.
No problem in these income tax exempt states
There are nine states that do not have personal income tax laws. This means there is no income tax liability for remote or mobile workers.
Florida is among them, so that's good news for those who may have taken refuge in the Sunshine State to avoid the winter weather.
You also don't have to file a separate return if you worked in Alaska, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Wyoming, or Washington.
The District of Columbia's autonomy law also prohibits it from taxing non-residents.
reciprocal agreements between nations
Other states have reciprocal tax agreements. This means that residents who work in another state are not taxed in their home state.
For example, if you live in Virginia but commute across the border to Maryland for work, you don't have to pay taxes or file a return in Maryland.
Similarly, if you live in Wisconsin and travel to Illinois for work, you only need to pay taxes in Wisconsin because the two states have a reciprocity agreement.
According to the nonprofit National Taxpayers Union Foundation, 15 states and the District of Columbia currently have reciprocal agreements.
Earlier this year, the think tank announced Remote Duty and Mobility (ROAM). indexranks each state's tax laws and regulatory policies on how they impact remote workers.
States with no income tax burden or those with the most participation in reciprocity agreements rank highest.
The National Taxpayers Union Foundation (NTUF) ranks states by how their tax laws impact remote and mobile workers in the Remote Obligation and Mobility (ROAM) Index.
tax credit
If there is no reciprocity agreement between the two states, some states allow you to deduct taxes paid in states where you do not live but work.
For example, if you live in California and work in Arizona, you must file income tax returns in both states to receive the credit.
This means filing a state resident tax return in California that lists all sources of income, and filing a nonresident tax return in Arizona that lists only employment income.
According to NTUF, this could result in commuter taxpayers paying the higher of the two states' tax rates.
Filing threshold
According to NTUF, it's also important to check the filing standards for the state in which you work.
The filing threshold represents how long a taxpayer must work in a state before he or she must file an income tax return in that state.
Each state has different rules regarding the requirements that a taxpayer must meet before filing an individual income tax return.
NTUF's Andrew Wilford said remote-friendly state tax policies could be beneficial for employees and employers.
“In the majority of states, nearly all taxpayers must file an individual income tax return in that state from the day they earn income in that state, a requirement that most taxpayers are probably not aware of. No,” the report states.
In 2023, Indiana and Montana introduced new rules that say nonresidents don't have to file a tax return until they work in the state for 30 days or more.
As a result, Indiana currently ranks as the state with the highest income taxes on NTUF's index.
NTUF's Andrew Wilford told DailyMail.com that remote-friendly tax policies could attract employees from other states and employers with employees across the country.
“By simplifying tax treatment for both groups, Indiana will relieve remote taxpayers and their employers from the obligation to file Indiana tax returns based on several days of work in the state. , accomplished both by shielding taxpayers from the complex return filing process of claiming credits on taxes paid to other states in two or more states, he said.
If you work in a different location than where you live, you may need to file income tax returns in multiple states.
Employer's convenience
Some states also have so-called “employer convenience rules.”
This means that if you work in another state for your own convenience and are able to commute, you are responsible for paying taxes in the state where your employer is based.
This could expose taxpayers to the risk of being taxed twice on the same income.
Some states offer tax credits that can offset some or all of the taxes you pay to your employer's home state.
For example, New Jersey offers a credit to offset taxes residents paid to New York because their employer was based there, even though they were working from home.
Alabama, Delaware, Nebraska, New York, and Pennsylvania have fully imposed employer accommodation provisions, and Alabama will join this group in 2023.
New Jersey also introduced its own convenient employer rule last year that allows employers to collect a portion of the tax revenue they pay in credits.
It imposes a so-called “retaliation” version of the rules, which apply only to residents of states that impose rules that favor them. This particularly affects New York residents who work in New Jersey.
