If you're still working from home because of the COVID-19 pandemic, you probably found that you're saving a bit of money every week on dry cleaning, commuting, and your dirty little latte habit. But while you might have some extra pocket change as a result, the bigger question is how your new status affects your 2020 tax returns. Can you write off that new work computer you just bought for the home office? And if you temporarily uprooted to a different state, which state do you pay taxes in?
We talked to some tax professionals to help answer a few burning questions about how your (virtual) trip to the accountant might look a little different this year.
1. Do I qualify for the home office deduction?
Per the 2018 Tax Cuts and Jobs Act, employees who work from home are no longer eligible for the home office deduction through 2025. So, unfortunately, if you get a W-2 tax form from your employer, you won't get any breaks on the fancy new office chair you splurged on.
The best-case scenario is if your employer reimburses you for any home office-related purchases you need to make in order to work remotely, Tai Stewart, an enrolled agent and founder of Saidia Financial, explains. It’s basically a win-win for you and your employer. “Your employer would be able to take the deduction on the business’s taxes, but you wouldn’t have to claim that as income,” Stewart says.
So, while your employer can deduct certain expenses if they paid for your internet, equipment, and software, you, the employee, could not. But if you’re self-employed or are an independent contractor, the good news is you can still claim a home office deduction, as Josh Zimmelman, managing partner of Westwood Tax and Consulting, tells us.
First, you’ll need to qualify. In order to do so, your home office must be a designated space that is used exclusively and regularly for your trade or business,” according to the IRS, and be the primary location of your business. “[If] you turned part of a spare room into a workspace, you may be able to claim it,” Zimmelman says. “If you just bring a laptop into the den sometimes, that’s not a home office and not deductible.”
2. Are there any new deductions that I could be eligible for?
The main tax credit that you might be eligible to receive on your 2020 taxes is the Recovery Rebate Credit. If you didn’t receive a stimulus check in 2020, or didn't get the full amount—which was $1200 for individual tax filers and $2400 for married folks—you could claim this credit, which was part of the CARES Act.
Here’s the particularly sweet part: If you didn’t receive either of the two stimulus payments in 2020, you might be able to receive it with your 2020 tax return, Stewart explains. It would get tacked on to your refund.
3. I work from home in one state but my employer is located in another. Which state income taxes do I need to pay?
Let's say you work 100 percent of the time from home in 2020 in a different state than the one your employer is physically located in. In that case, you typically only need to pay income taxes in the state you reside in, not in your employer’s state, Stewart says. But if you performed work in both states before your company moved to a remote setup, then you might need to pay income taxes in both.
However, some states have reciprocal agreements with each other, Zimmelman explains. What this means is that you would only need to pay taxes on where you live, even if you did work in another state. These are usually neighboring states, and it depends on where you live and where your employer is based. For example, New Jersey and Pennsylvania have a reciprocal agreement.
While you might only need to pay taxes in the state you live in, you would still need to file returns in both states: a resident return in your home state, and a non-resident return in the other.
4. In 2020, I temporarily moved to a different state because of the pandemic. How might this impact my taxes?
As mentioned, if you work for an out-of-state employer and didn’t perform any work in that state in 2020, you probably won’t need to pay income taxes in that state, Zimmelman says. But let’s say you then moved to another state for a few months in 2020 because of the pandemic. In that case, you might need to pay income taxes in both your original home state and the one you moved to, even if it was only temporary.
“Typically, you would divide your income and deductions between the two returns, based on how long you lived in each state,” Zimmelman says. “However, some states have more complicated rules, so check each state’s process to make sure you’re doing it right.”
Remember: Even if your move was only temporary due to COVID circumstances, you might still owe taxes in that state. “The longer you stay away from your home state, the more likely you will have a tax obligation in the second state,” Zimmelman says. “And that doesn’t mean you’re exempt from taxes in your home state.”
5. I worked part-time and received unemployment benefits or compensation from a work-share program. Do I need to pay taxes?
Work-share programs provide employees with partial unemployment benefits if they see their hours reduced by a certain percentage, and PUA [Pandemic Unemployment Assistance] benefits “[are] used to help families who are unemployed, underemployed, or unable to work because of the current pandemic situation,” Stewart explains.
“Generally speaking, however, the compensation received from a work-share program or PUA benefits is taxable income,” Stewart says. “Just as you may be required to pay income taxes when you collect unemployment compensation, this type of compensation would fall under taxable income.”
6. I received a stimulus check last year. Do I need to pay taxes?
While this doesn’t pertain just to work-from-home folks, it’s something that has probably crossed your mind. In short, the stimulus check is not taxable income, but you will need to record it on your tax return. Note that it doesn’t factor into your refund or any taxes owed, Stewart explains.
7. Any tips for a virtual trip to the accountant?
As an employee, the deadlines for receiving your W-2 haven’t changed, Stewart says. And just like you would if you weren’t working from home, keep all tax-related documentation on hand and keep good records. Also, consider the fact that your tax professional is probably working remotely, Zimmelman adds. That means you should have all your tax documents handy, so they can be sent to your accountant electronically. And make sure to test that your phone or scanner can get a high-quality digital copy of your documents before setting up an appointment.
“Don’t just email your documents, or you might open yourself up to identity theft,” Zimmelman says. “Ask your accountant if they have a secure portal for uploading important documents.”
The rules and deadlines might change again before the April 15 deadline, so keep an eye out for any developments and reach out to a tax professional for updates.