The Focus - Our Tax E-Newsletter
Working Remotely: A Blessing or a Curse?
A little over 18 months ago the unthinkable happened as COVID -19 ripped through our communities. Businesses were forced to close and employees were sent to work from home. Employers and employees scrambled to establish a remote work "office". Fast forward to today, the majority of businesses have reopened their doors but employees, given the option, have elected to work remotely in record numbers.
This migration to working from home has created several tax issues, some positive and some not so positive. For example, are you entitled to deduct your "home office" expenses, have you changed your "domicile", are you now subject to a different states income tax, or worse are you subject to double state tax?
The Home Office Deduction:
This benefit allows taxpayers working from home to deduct certain household expenses on their personal tax return.
The home office deduction is available to qualifying self-employed taxpayers, independent contractors and those working in the gig economy. The Tax Cuts and Jobs Act (TCJA) of 2017 eliminated this benefit for employees who receive a paycheck or a W-2 exclusively from an employer, even if they are currently working from home.
For those who do qualify, there are two basic requirements for the deduction:
- The taxpayer needs to use a portion of the home exclusively for conducting business on a regular basis.
- The home must be the taxpayer's principal place of business.
Unfortunately, the majority of employees who have migrated to the home work environment will not qualify for this benefit for Federal tax purposes due to TCJA. The good news is that New York State has opted to not follow many of the changes implemented by TCJA, one being the deduction for unreimbursed employee business expenses. This is good news for NY residents who itemize their deductions.
There is a solution to the Federal tax problem. A little known tax law (Sec. 139) allows employers to make tax free "qualified disaster relief payments" to employees for various reasonable and necessary expenses. On March 13, 2020 then President Trump declared the COVID 19 pandemic a national emergency allowing employers to establish a (Sec. 139) program to provide these tax free payments.
Employees who have opted to work from home also face new often complex state residency rules. As people have realized they can now work form anywhere, they don't have to rent that expensive apartment in Manhattan, they can do the same job from their condo in Florida. The key issue here is, are these migrations sufficient to support a change in tax residency or possibly create multi-state income tax.
New York for example determines residency based on your "domicile" or "statutory residence". Domicile refers to your intended permanent home, a place you intend to return to after an absence. You can only have one domicile even if you have more than one house. In this situation the state will evaluate your intent, length of time spent at each location and any other factors they deem necessary to prove domicile residency. Statutory residency is based on the number of days spent in New York. For example, if you maintain a home within the state and spend more than 183 days there you will be taxed as a full year resident of the state. The definition of maintaining a home can become very complicated as there are situations where a home may only be available part of the year (a camp or cottage), owning a home in another state and renting in NY for only occasional use. Also, the taxpayer must be careful in counting the number of days spent in NY as any "part day" is counted as a full day of residence. Additionally the home must be maintained for a substantial part of the year (exceeding 11 months) to be considered in the 183 day threshold. For example, if you acquire a home in March and spend more than 183 days in the state within the calendar year, you would not be considered a "statutory resident" (you may then fall within the part year resident rules).
A Potential for Double Tax:
Many states have rules/credits in place in order to prevent "commuters" from paying double state income tax to more than one state. The problem arises when employees are no longer commuting from neighboring states, but have moved to other locations and are now telecommuting. Six states (NY is one of them) have what is known as convenience rules. This allows the employer (state) to issue an income tax on their employees if they do not reside within the state. So If you've been working remotely in another state due to the pandemic, you could be subject to taxes in the state where your office is located if it follows the convenience rule. However, you'll also be responsible for paying taxes in the state you're currently living and working in.
The residency rules are extremely fact driven including several steps required to be followed to ensure a complete residency change. This can become very complex and it is important to contact your tax professional at Dermody, Burke & Brown if you are contemplating a change in state residency.
The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.