By Laura Saunders 

If you're one of the millions of people who have worked from outside your home state this year, tax season could be tough: You might need to file returns and pay taxes to more than one state for 2020.

The challenge is that each state's tax system is a unique mix of rules, and they are even more confusing this year because of pandemic-related changes.

Here's what to know.

Q: I worked from two states in 2020. Does that mean I'll owe more taxes?

Potentially yes, but it depends on the states.

A few states don't have income taxes, but nearly all that do impose them on workers who are just passing through. Many of these states -- including New York and California, which are famously aggressive -- are still set to levy taxes on remote workers for 2020.

However, not all remote workers will face new cross-border burdens. About 15 jurisdictions, such as Maryland, Virginia and the District of Columbia, have long had agreements with neighbors allowing commuters to file and pay taxes where they live.

In addition, 15 states and the District of Columbia have said they won't enforce their tax rules for remote workers who worked in their state because of the coronavirus, according to American Institute of CPAs spokeswoman Eileen Sherr, who tracks this evolving data.

In a few cases, remote workers could be net winners and owe lower total state taxes for 2020 if they are in a low- or no-tax state. For example, Texas has no state income tax, so a San Francisco tech worker who moves there might be able to avoid the high California income tax on compensation earned while in Texas.

Q: Why would I have to file and maybe pay taxes to two states?

A: Each state tax system is a unique mélange of rules that consider how long a worker is there, what income is earned, and where the worker's true home, or domicile, is.

These rules are famous for taxing out-of-state entertainers and athletes like Michael Jordan and Alex Rodriguez. But this year such rules will complicate filings and payments for regular folks working remotely because of the pandemic. Take the examples of a Seattle-based tech worker who has temporarily moved back to his parents' house in Oregon or a New York banker who has set up a desk in a Florida beach home.

Many states have credits to prevent or reduce double taxation. But these credits may not fully offset taxes elsewhere, if the remote work is in a state with higher taxes than the home state. For example, a Seattle employee who works remotely from Oregon during the pandemic and owes Oregon income tax won't get a credit from Washington, because it doesn't have an income tax.

Q: How will states know that someone has worked there?

A: In various ways. Employers will include information on W-2 forms, and tax preparers will ask their clients, and neither will submit false information that could put them in jeopardy. DIY filers should remember that tax returns are signed under penalty of perjury.

Q: How do I start my taxes this year if I worked in more than one state?

First, determine where you were in 2020. How many states did you work in? How many work days did you spend in each state?

Next, find out the criteria for being considered a taxable resident of the states where you were.

Are there special pandemic rules that make them different this year? Does the state you worked from have an agreement with the state where your office is located to prevent double taxation? These are common in states that share a border, such as Wisconsin and Illinois.

For more on how to prepare for tax season as a remote worker, see here.

Q: How do I find the rules for the states I've worked in?

A: For information, check state tax websites or this chart from the AICPA.

Also check taxes on nonresidents if you worked in a state but not long enough to be a resident there. Most states have these rules.

Q: What else should I do?

Talk to your employer. State tax authorities can be aggressive, but they may desist if your employer has assigned you to an existing office in another state and then withheld taxes for that state.

"Domicile" also counts. State tax law often considers where the worker's true home is in addition to time spent in-state. Key factors include where someone votes, has club or religious affiliations, has a driver's license and plans to be buried.

Finally, think seriously about getting professional help if your situation is complicated -- such if you got married, sold a home or had a large windfall or loss.

Q: What if my job is based in New York, but I have worked from another state?

A controversial rule will likely affect thousands of New Yorkers and others whose offices were closed this year because of the pandemic. The rule's importance will grow, as out-of-state telecommuting becomes more common, especially if more states adopt it.

The "convenience" rule taxes individuals where a job is based -- not where they reside or work, unless the employer requires the remote work at a bona fide work location.

In other words, someone with a New York-based job who lives and telecommutes from another state still owes full income tax to New York on that compensation. If the other state taxes that income as well and doesn't give a credit for the New York tax -- as some states don't -- the worker will likely be double taxed.

New York isn't alone in asserting the convenience rule. Arkansas, Connecticut, Delaware, Nebraska and Pennsylvania also have it, according to Ms. Sherr of AICPA.

This year's wrinkle in the rule is that many people are working remotely not because they want to, but because their offices have been closed. That fact may not make a difference. For example, New York still wants workers with jobs based in New York to pay New York income taxes, even if they worked remotely from New Jersey for most of 2020.

In addition, Massachusetts still wants people with Bay State-based jobs to pay Massachusetts income taxes, even if they worked from New Hampshire for most of 2020. New Hampshire has sued Massachusetts over this issue in the U.S. Supreme Court, but the high court hasn't said if it will accept the case.

For more on the convenience rule, see here.

Q: Do New York City residents have to pay New York City income tax, if they worked outside NYC during the pandemic?

Yes, because people who are telecommuting because of the pandemic are still New York City residents.

Q: What if I'm self-employed?

Business owners who worked in more than one state in 2020 could also need to file and pay taxes to those states.

Q: Can I take a home-office deduction for working from home in 2020?

Not if you're an employee rather than a business owner. As part of the 2017 tax overhaul, Congress nearly doubled the standard deduction and repealed several write-offs on Schedule A. One was a partial deduction for unreimbursed employee expenses, such as a home office.

Self-employed business owners typically can deduct a range of expenses, including for home offices.

The good news, for employees, is that companies can reimburse them for many pandemic expenses for working at home, such as better internet services or office equipment. These payments are deductible by the employer and don't count as compensation to employees, either for income or FICA taxes.

For more on home-office deductions, see here.

Write to Laura Saunders at laura.saunders@wsj.com

(END) Dow Jones Newswires

January 26, 2021 08:18 ET (13:18 GMT)