Your Work has Changed, Will your Taxes Too?
Life amid the COVID-19 pandemic has shifted the working world in radical and ever-evolving ways. For those fortunate enough to keep their existing jobs, or those who have shifted to new or additional work, “work from home” (WFH) has become much more common. For many this won’t alter their tax situation, but for some—like those that live in one state and work in another, or those who had to invest significantly to set up a home office—you may want to take a second look.
With our firm’s home base being in Vancouver, Washington, we have many clients who cross the I-5 or I-205 bridge to get to-and-from work. When thinking of those clients and the potential impact of working from home, we have a few things to consider when looking at their taxes as part of their larger financial picture.
For those working in Washington but living in Oregon, the situation doesn’t change much as any income earned by an Oregon resident is subject to Oregon income tax, even if their work took place across the river.
But for those in the opposite situation—working in Oregon but living in Washington—a potential opportunity arises. If someone is living—and now also working—in Washington they have the potential to be able to shield that income from Oregon state taxes since they are not an Oregon resident and are no longer or not currently working in Oregon. Before implementing this strategy, you should talk with your experienced tax advisor and track where you earned income thoroughly for your records. We even advise clients request a letter from their Oregon employer stating the time worked in Washington that can be put with their return to further support their claim.
When we talked about the potential tax implications of remote work at a team meeting, one of our financial planners relayed the story of clients who recently had a unique tax situation arise:
“We just had a client move from Oregon to California, and both states have an income tax. They ended up paying Oregon’s tax on all their income but got a credit for that tax on their California return so they didn’t end up owing any California tax.”
The planner added the caveat that there are several factors that go into that equation–length of time in another state, whether the stay is permanent or temporary, their official state of residence or not, et cetera—so be sure to consult a tax professional before making any assumptions.
Another piece to consider is whether your transition to WFH involved a significant retooling of your home workspace to accommodate the area and tools you need to get your work done. The Tax Cuts and Jobs Act of 2017 eliminated previous opportunities to deduct work expenses that are not reimbursed by your employer and the costs of moving for a new job, if itemizing personal tax deductions. If you’re self-employed it’s still possible to take a home office deduction as well as deduct expenses incurred while working at home. For the W-2 crowd however, you’ll need to look to do this on your state taxes instead. Several states still allow for these deductions, including California, New York, Minnesota, Arkansas, and Alabama. Each state’s rules are slightly different, so be sure to consult your tax professional before claiming any particular deduction.
Many people’s work and home schedules have been blended into a new normal that may last much longer than initially anticipated. If you are curious as to whether your new WFH reality may affect your taxes, talk to your financial planner, or reach out to your experienced tax professional. If you don’t have a tax professional or are looking to form a new personal or business tax relationship, reach out to our sister company Integrated Tax Services to set up a talk with a member of their team.
This material is intended to provide general financial education and is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel.
Written By Zach Reuter, CFP®