If you live in one state but
work remotely for an employer based in another, you risk paying more tax than
you would if you lived and worked in the same state. In a few cases, you may
even end up double taxed.
The good news: You can avoid
this fate if your home state has a reciprocal tax agreement with a neighboring
state, which establishes that your income would only be taxed by one of the
Such agreements exist in Illinois,
Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Montana, New Jersey,
North Dakota, Ohio, Pennsylvania, Virginia, West Virginia, Wisconsin as well as
the District of Columbia.
Or, absent a reciprocal
agreement, those who work from home some of the time may be allowed to
split their income tax burden: They pay tax on income earned from home to their
resident state, and they pay tax to their employer's state for days they work
at the office.
But that's not always the
How you can end up double taxed
You risk being double taxed
if you live in one state but work for a company based in New York, New Jersey,
Delaware, Pennsylvania or Nebraska.
These five states apply a
so-called convenience vs. necessity test. If they determine that working from
home is a matter of convenience for you rather than a necessity for your
employer, "you will owe taxes to those states on the income you earn
during your work-from-home days," said Cosimo Zavaglia, an associate at
the law firm Morgan Lewis.
New York is toughest in this
regard, according to Roxanne Bland, a contributing editor to State Tax Notes.
For instance, to contend
that working from home is a necessity, you must prove you could not possibly do
your work at your employer's office or that your employer requires you to work
from home as a condition of employment. You also may need to prove the employer
has a business purpose to have an office exactly where you live or that you
regularly hold business meetings at your home office and never use it for
personal reasons. The list goes on.
"Very few telecommuters
would meet this standard. Thus, New York's convenience of the employer test
will likely result in double taxation of a telecommuter's income," Bland
wrote in Tax Notes.
That's because your resident
state may also choose to tax the income generated by your working from home.
Fortunately, many states
give you a tax credit for any taxes you pay to another jurisdiction. So
effectively you end up only paying income tax to one state when all is said and
done, although you still have to file two state tax returns.
But not all states are so
generous. Connecticut, for instance, only gives residents a credit for taxes
paid to another state for income earned in that other state. It won't give you
a credit for money you earned working from your living room in Fairfield.
So if you telecommute from
Connecticut to an employer based in New York you'll end up being double taxed
on the portion of your income earned from home.
California has different
rules. It taxes its residents on all income, regardless of where it's earned.
So if you live in California and telecommute to an employer based in New York,
you could be double taxed on at least a portion of your income as well.
When you'll simply pay more
More common than double
taxation is the risk of paying more tax than you otherwise would if you simply
lived and worked in the same state.
If you telecommute from
Florida — which has no state income tax — but work for an employer in a state
with an income tax, you'll likely end up paying that on some or all of your
Or if you work for a company
in a state with a higher income tax than your home state, you'll end up paying
the higher of the two amounts, according to Zavaglia. That's because your home
state will only give you a tax credit up to the tax you'd owe if you earned all
your income in-state.
He added that "this
increase in total taxes is even more of an overall concern now that state and
local taxes in excess of $10,000 are no longer deductible at the federal
here for the original article from CNN Money.