If you normally commute across the border but live in Connecticut, the new trend toward remote work could leave you with a larger tax bill. Working for months from your home is income earned in Connecticut, regardless of the location of your regular office. The presence of a teleworker in another state would generally create an income tax nexus, creating new tax withholding and filing obligations for the employer. As of September, sixteen states have modified some of the normal rules in response to the pandemic.
Connecticut is still a wildcard
Connecticut has not yet issued guidance on the matter, which opens the possibility of double taxation. The CT Department of Revenue Services is on the record that they are “in the process of developing such guidance, which will ensure fair and equitable treatment of Connecticut resident individuals, as well as Connecticut-based businesses.”
Until official guidance is released, we don’t yet know if CT plans to tax any income made for days physically working in Connecticut regardless of it being taxed by another state (other than a small handful of states with reciprocal “convenience of the employer” rules). We will post updates as we receive them. If this situation applies to you, keep careful track of the number of days you telecommuted this year and be sure to consult a Connecticut tax professional.
Massachusetts announced new temporary guidance to deal with teleworkers across the border, set to expire on December 31, 2020 or 90 days after the emergency order is lifted, whichever is earlier.
Those who worked in Massachusetts before the pandemic and now temporarily work from home in another state will continue to be taxed by Massachusetts. (The governor of New Hampshire has filed a lawsuit against Massachusetts in response.)
For those who worked in another state but now work from their Massachusetts home, they will be eligible for a credit for taxes paid to the other state and their employer is not required to withhold Massachusetts taxes.
As of January 2019, Connecticut and New York have standing reciprocal “convenience of the employer” rules to determine tax jurisdiction for teleworkers. If your telecommuting is considered to be for your “convenience” rather than the employer’s “necessity” (i.e. the nature of your job is such that you couldn’t physically perform it elsewhere), the state containing the employee’s regular office is entitled to tax the income, rather than the state where the employee is currently located. The state of residence will credit taxes paid to the other state on the taxpayer’s return. This prevents the employer from having additional withholding and tax filing obligations and avoids double taxation of the employee. Neither state has clarified if a state executive order for Covid-19 changes the telecommuting to a “necessity”.
In May, Rhode Island announced new temporary guidance to deal with teleworkers who normally work or live elsewhere. Under the emergency regulation, those who worked in Rhode Island before the pandemic and now temporarily work from home in another state will continue to be taxed by Rhode Island.
For those who worked in another state but now work from their Rhode Island home, their employer is not required to withhold Rhode Island taxes.
In one additional blow, that comfortable home office you set up for yourself is not tax-deductible. According to the Tax Cuts and Jobs Act of 2017, through 2025 unreimbursed job expenses, including any home office costs, are not deductible for federal income tax purposes if you are a W-2 employee. Self-employed workers still can take the deduction if their home office meets strict qualifications.