Taxing Challenges for the New Work-from-Home Labor Force by Karen A. Lake, CPA, CFST
Posted on September 08, 2020
by
Karen Lake
The COVID-19 pandemic has forced a record number of taxpayers to work from home, creating a sea of new income tax challenges they had not previously been required to consider. Despite all the conveniences of work-from-home (WFH) policies, employees need to prepare themselves for how this new normal will impact their state and federal tax liabilities when they file their 2020 tax returns next year.
Tax Nexus for Employees
Under federal tax laws, individuals report and pay taxes based on where they work or earn income. Therefore, a person living in New Jersey who commutes daily across the bridge to an employer’s office in New York will be subject to New York state income taxes, including tax withholding and a potential requirement to file a non-resident income tax return in New York. Because New Jersey requires residents pay state tax on all their income, regardless of where it is earned, the commuting worker will also have to pay income taxes in New Jersey. However, several states have reciprocity agreements with each other, allowing their resident to avoid paying taxes twice on the same income and instead basing those tax liabilities on where taxpayers live rather than where they work.
For example, a reciprocity agreement between New Jersey and Pennsylvania ensures that residents in one state do not pay taxes on income earned in the other state. So, a person living in New Jersey who commutes to a job in Pennsylvania may claim a credit on his or her New Jersey income tax returns for taxes paid in Pennsylvania. Not only can this reduce the taxpayer’s New Jersey income tax liability, but it can also allow high-earning taxpayers to receive the benefit of Pennsylvania’s top tax rate of 3.07 percent, rather than New Jersey’s top rate of 8.97 percent.
Home Office Deductions
Before the enactment of the Tax Cuts and Jobs Act in 2018, employees who worked at home “at the convenience of their employers,” could claim a home office tax deduction and subtract certain home expenses from their individual federal income tax returns. This is no longer the case. Currently, the home office deduction is only available to those taxpayers who meet the following requirements:
- The home is the taxpayer’s principal place of business and the location where he or she conducts substantial administrative and/or management activities, and
- The taxpayer regularly and exclusively uses a specific room or separately identifiable portion of the home for conducting business on a regularly basis.
Consequently, most W-2 wage employees who are telecommuting in the wake of the coronavirus will not be able to claim any of the costs they incur to establish and maintain a temporary home office. As with most provisions of the federal tax laws, there are several exceptions to this rule for certain independent contractors, members of the Armed Forces and others.
For those taxpayers who do qualify for the home office deduction, there are two methods they may use to calculate their eligible expenses:
- A simplified method allows taxpayers to assign $5 a square foot to up to 300 square feet of measurable space they use as their home office, giving them a maximum deduction of $1,500, or
- Taxpayers may keep track of all their indirect home office expenses, utilities, insurance, rent, and general home repairs, and deduct the amount equal to the percentage of the home they use solely for business activities. Direct expenses are deducted in full.
We are living in unprecedented times for which individuals and businesses should work with experienced advisors and CPAs to ensure they maximize their tax efficiency while maintaining compliance with ever-changing regulations.
About the Author: Karen A. Lake, CPA, is a state and local tax (SALT) specialist and an associate director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where she helps individuals and businesses navigate complex federal, state and local tax laws, and credits and incentives. She can be reached at the firm’s Miami office at (305) 379-7000 or info@bpbcpa.com.
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