How Working Remotely From Another State Might Affect Your Taxes

There's no doubt that remote work has gained momentum over the last few years. Many companies are permanently rethinking their approach to working outside the office as employees express interest in the perks of working from home.

If you are one of the many workers who have moved closer to family, moved to less crowded or less expensive areas, or tried a "workcation" for a change of scenery, your taxes might look different this year. This is especially true if you worked while living in a different state than where you're employed or have your permanent residence.

Ahead are a few top tax tips that all remote workers, particularly digital nomads, should keep in mind. Of course, as with all things tax-related, if you have specific questions, reach out to an accountant to discuss your situation (and see if you qualify for some common tax deductions).

Important State Tax Implications

Before you panic about your tax bill, remember that every tax situation is different (and most people won't get taxed twice). However, that isn't always the case. "A lot of people are moving around, so there could be more complicated tax implications," says Scott Taylor, CFA, a financial advisor at Northwestern Mutual. "There are certain states and certain situations where you could be double taxed."

Double Taxation

Chances are, you won't actually be double-taxed—aka taxed for the same income in two different states, paying twice as much in taxes as you normally would. That said, you do want to be aware of which tax laws apply to you and your unique remote work situation.

If you've been working from home in the same place you normally live, nothing will change for your taxes this year. You'll file your taxes as you always have and will either owe money based on your withholdings for the year or receive a tax refund.

Residency Requirements

If you have traveled to another state (or several) and worked while there, you may owe taxes in the state where you worked, even if you weren't there for the whole year. States have different rules for how long someone must be there before they're considered a resident for tax purposes.

Claire Grant, a financial writer at an investment services company Stash, says most states count someone as a resident after they have stayed in that state for 183 days, even if their primary residence is in another state. Other states may have shorter or longer time ranges: If you've stayed in a state for an extended period of time, talk with an expert to see if you qualify to be taxed in that state.

Reciprocity Agreements

If you do qualify for taxes in more than one state, there's still no need to panic. Many states have reciprocity agreements that allow workers to live in one state and work in another without getting double-taxed, so you can likely avoid owing more than you'd like. Taylor says you should work with a CPA to figure out how to do so.

How to Adjust Your Tax Withholdings

If you moved permanently, you should have changed the address associated with your HR department, bank accounts, driver's license, mail delivery, and other key accounts. Doing so makes your move official, so to speak, and means you no longer owe taxes in the state you moved from. If you did not change this information during your move, you may face some challenges. Either way, you should adjust your tax withholdings after your move to reflect your new state's taxes.

Moving Out of a No/Low Income Tax State

Those who will see the biggest changes in their taxes are people who moved—permanently or temporarily—from a state with no income tax (these are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming) to a state with income tax. Their taxes will be much higher than in the past, particularly if they did not adjust their withholdings accordingly.

"If you do move from a lower income tax state to a higher income tax state, I would make sure you're withholding the right amount of money," Taylor says.

Moving Out of a High Income Tax State

Another group that should pay attention during tax season are those who moved from states with high-income taxes to those with low or zero-income taxes—and are trying to avoid paying state income tax. "If you want to move there for a couple of months just to lower your taxes, that's probably not going to happen," Taylor says.

States want to collect income taxes and will likely not overlook temporary moves. Unless you took steps to change your permanent residence, you will probably not be able to get away with paying no or less money in state taxes.

Possible Deductions for Remote Workers

For Gig Workers and the Self-Employed

If you are self-employed and your home is your principal place of business, you can qualify for a home office deduction. But it has to be a part of your home you use regularly.

"It doesn't need to be a separate room; it can be part of your basement or anywhere designated as an office where you don't do anything else—so, your kitchen table wouldn't count," says Eric Bronnenkant, CPA, and head of tax at Betterment.

However, it doesn't have to be the only place you work. "For a gig worker or ride-share driver, a designated area where they handle all their administrative bookkeeping tasks would qualify as a principal place of business," Bronnenkant explains.

For Workers With a W-2

If you receive a W-2 from your company, you are not eligible for the same remote work deductions. But there are some options for you, too: "Mileage and travel expenses can be deductible if their company doesn't already reimburse for those costs," says Stepanie Ng, CPA.

If you're an educator working from home, you could receive a $250 deduction for expenses such as computer equipment. "Per the IRS, teachers can deduct un-reimbursed costs for computer equipment (and related services), software, supplementary materials, and supplies," Ng explains.

For W-2 employees looking to deduct expenses, Ng suggests keeping careful records in case of an IRS audit.