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How Do I Pay Income Taxes When Working Remotely in a Different State?

Here's everything you need to know

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The IRS recently opened, and you can now e-file your 2020 state and federal tax returns. Online tax software can help you file both returns at once. It can also help you get your refund fast. The IRS recommends e-filing and choosing direct deposit to prevent any delays. You can usually expect your tax refunds within 21 days according to the IRS.

Why You May Experience Tax Issues This 2021

The year 2020 was all about remote work and gig culture. Even though the new look-back provision allows you to use your 2019 income for key tax credits, you may experience difficulties if you lived in multiple states last year.

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Working remotely from anywhere but your domicile state (where you officially live) can lead to double taxation if you earned the bulk of your income in a different state or stayed there for a significant amount of time (six months for many states). At the least, you may end up experiencing administrative issues; at worst, you may owe taxes to more than one state.

Do I Owe Taxes to Multiple States?

As convenient as it may have been to clock in for work from virtually anywhere, temporarily sheltering in a different state for several months matters when it comes to your taxes. Whether you owe tax to another state aside from your domicile state will depend on your states' rules. If you are unsure whether you owe another state additional tax, read Filing Taxes When You Live in One State and Work in Another. TaxSlayer will also guide you through entering any forms you receive, including taxes you paid to different states.

Since everyone's tax situation is different, here are some of the guidelines you need to know before e-filing your 2020 tax returns:

State of Domicile Versus State of Residence

Understanding the key differences between these two will help you determine if you owe taxes to multiple states. States run two tests to find out a person's domicile state and their state of residence for computing taxes, if any.

In a nutshell, your domicile state is basically your permanent residence. This is where your bank accounts are registered, where your physical possessions lie and where you return after a vacation. You can only have one domicile state at any point in time, and this state will hold authority over the tax you pay on your income, no matter where else you might spend your time.

However, you can only have multiple states of residence outside of your domicile state when you qualify for the state's residency rules. Many states will consider you a resident if you have spent more than 183 days (six months) there in one calendar year. This is where additional income taxes will come in.

There are also states that will consider the amount of money you earned while living there to determine if you need to pay additional taxes. Generally speaking, you may need to pay taxes if your income in a state of residence is above a certain threshold, like 50% of your total earnings.

Thankfully, many states have come up with multiple provisions to help Americans save money, even if they owe taxes to multiple states.

What Are the Available Options for Tax Relief?

Since COVID-19, millions have moved after their offices shut down, their rent skyrocketed, their jobs were lost or they wanted to be closer to family. Because of this, states have adopted various tax schemes to collect their fair share of revenue for their residents without overtaxing them.

These 13 States Won't Bother You for Temporary Stay

To help avoid double taxation, these 13 states have agreed not to require companies to withhold state income taxes for those who have temporarily relocated during the pandemic.

The states are as follows:

  • Alabama
  • Georgia
  • Illinois
  • Indiana
  • Massachusetts
  • Maryland
  • Minnesota
  • Mississippi
  • Nebraska
  • New Jersey
  • Pennsylvania
  • Rhode Island
  • South Carolina

Key Tax Credits

Some states will offer certain tax credits to taxpayers who qualify for resident rules in more than one state. Simply put, this is a dollar-for-dollar reduction of your outstanding tax for the tax levied by a non-domicile state.

Tax Relief for Those Crossing State Borders Every Day for Work

It is quite common for taxpayers in the Northeast to cross state lines for work every day. In fact, this is the sole reason why many neighboring states have reciprocity agreements to avoid double taxation for these workers.

Typically, reciprocity agreements state that you are considered a non-resident of the state you work in (where your income is sourced) and a resident of the state you live in. In this case, you may be required to file a resident return as well as a non-resident return.

How to Avoid Huge Taxes

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If you moved during this financial year, let your employer know that you temporarily changed your address. They can help with the tax withholding requirements of the state your company is in and the state you reside in.

A smarter way to expedite the whole tax filing process with bigger tax breaks is to use tax preparation software or to consult a tax professional. This way, you can easily identify the rules and relief that apply to you without any hassle or stress.

TaxSlayer's tax preparation software can help you accurately e-file one federal and one state tax for free. The Augusta-based firm has been helping taxpayers e-file returns in a timely manner and save money for over 50 years now. In 2020 alone, they helped complete over 10 million state and federal tax returns and processed over $15 billion in refunds.

Use the promo code SLAYIT35 to get 35% off your federal tax return when you file with TaxSlayer.

E-file your 2020 tax returns with TaxSlayer today!

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