Many taxpayers who originally thought that working from home would be a temporary circumstance are beginning to find out that their arrangements may become more permanent, and are also learning there are a myriad of tax implications to be aware of. The tax items may impact not just 2020, but continue into 2021 and beyond while the world waits for the COVID-19 pandemic to subside.
The home office deduction
The Tax Cuts and Jobs Act of 2017 continued to allow self-employed people, and owners of partnerships and S corporations, the ability to deduct their home office expenses on form 8829 filed annually with their 1040, but eliminated the deduction for all other taxpayers. Even though employees no longer have the ability to deduct their expenses on their tax return, if their employer has an accountable reimbursement plan employees can seek reimbursement from their employer for home office expenses, and those reimbursements are not taxable to the employee.
Massachusetts, along with the District of Columbia, California, Illinois, Iowa, Montana, New Hampshire, New York, Pennsylvania and South Dakota have statutes requiring employers to reimburse employees for necessary expenses as a result of their job duties.
Teachers retained the $250 above-the-line deduction for education supplies after the Tax Cuts and Jobs Act of 2017, and although the language states that the expense must be “used by the eligible educator in the classroom” we believe that this language applies to both virtual and physical classrooms.
State nexus issues
Congress introduced a bill in August called the Multi-State Worker Tax Fairness Act of 2020, which proposes temporary limits to a state’s ability to tax the wages of nonresident telecommuters. The bill, which is said to have bipartisan interest, would only give states the ability to impose income tax on a nonresident individual during the period in which the nonresident individual physically worked in that state.
Locally, Massachusetts and New Hampshire are currently discussing whether Massachusetts has the ability to impose income tax on New Hampshire residents who are working remotely and have not stepped foot in their Massachusetts offices in months. Massachusetts feels that even though New Hampshire residents are not physically present due to COVID-19 restrictions if they are still performing the same services for the same company their wages should be subject to Massachusetts income tax, as they have always been. The reason this is a bigger issue than in other states is that New Hampshire residents are not subject to an income tax, so even if they were to pay Massachusetts tax and receive a credit in New Hampshire there is no tax due to utilize the credit against.
Massachusetts is not the first state to take this position either. Arkansas, Connecticut, Delaware, Nebraska, New York, and Pennsylvania all have “convenience” rules that subject nonresident employees to income tax in each state regardless of where they are working from. For example, a Massachusetts resident who works from home for a New York employer would be subject to New York tax unless they satisfied a convenience rule in New York to be exempt from New York state tax.
As state and local economies remain in varying levels of suppression the need for additional revenue becomes more and more evident. With many companies adopting remote work environments not just for the short term, but many into late next year, we anticipate state departments of revenue will continue to try and impose their taxes on remote workers. We will continue to monitor new convenience rules and update our clients as they are released.