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The coronavirus made this tax season a challenging one for both filers and preparers – but ongoing issues related to the pandemic are likely to make next year equally confusing for many individuals.
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One big change is that people, specifically those who have been working remotely, may have to file multiple state income tax returns this year.
Typically, a worker is required to file a return in his or her state of residence as well as where he or she works, if those states are different.
Many workers may be faced, however, with different circumstances this year if they opted to work remotely in a state other than their typical, primary residence.
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Michael Corrente, managing director at the independent CPA firm CBIZ MHM, told FOX Business that these individuals will likely have to file two state tax returns (unless the states issue temporary guidance otherwise).
There are different rules in every state governing at what point a nonresident is required to pay taxes in the state. In some states taxes kick in automatically, while in others there is a weekslong grace period (i.e., after 14 days in New York).
And then there are more than a dozen states that issued coronavirus-specific guidance that states workers could stay there and work without paying any taxes while the emergency declaration was in effect. Some of those states are Rhode Island, South Carolina, Massachusetts and New Jersey.
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If a worker is in a situation where both the resident and the nonresident state where he or she is staying have issued this order, then he or she will have to make no adjustments to their situation while the emergency order is in effect. This, for example, would apply to a person who is a Rhode Island resident but is temporarily working from a relative’s home in Massachusetts.
Corrente noted that people who are working under different circumstances may want to contact their human resources or payroll department to let them know what has changed. That’s because the state where your employer is having your taxes withheld may need to be adjusted – a situation that could pose a problem for both you and your employer if it is not corrected by next year.
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And whether some people owe more in taxes next year will depend on how high the state taxes are where an individual is currently working vs. their home state.
In many cases, an individual can receive a credit in the resident state for taxes paid to the nonresident state. But if taxes are higher in the nonresident state, a worker could end up owing a little extra.
Additionally, there is a situation where workers could face double taxation, Edward Zelinsky, a tax professor at Yeshiva University’s Cardozo School of Law, told FOX Business.
In some cases a remote worker’s resident state may not provide a credit for taxes assessed in the employer’s state, Zelinsky said, because the income is actually earned in the state of residence.
Workers may want to keep a log of where they physically were and for how long, Corrente added, because if an audit were to be initiated the burden of proof ultimately falls on the taxpayer.
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