Most states impose income taxes on residents of their state. While each state has a different definition of what constitutes a “resident,” you are generally considered a resident of a state when you have a permanent home there or live there for most of the year. Those of us who live in Tennessee do not pay a state income tax. But if you spent some time working remotely in a different state, you might owe some state income tax to that state.
Living Out of State, Working for a Tennessee Employer
There are nine states that do not impose a state income tax on individuals: Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Tennessee, Washington, and Wyoming. If you moved to one of the other 42 states or the District of Columbia during the pandemic or afterwards, you might owe that jurisdiction income tax – even if you continued to work for your Tennessee employer.
As an example before the pandemic, if you lived in Georgia but commuted to Tennessee to work, you would have filed resident Georgia income tax returns and paid Georgia income tax on income even though it was Tennessee source income. Conversely, if you worked for a Tennessee employer and moved to Georgia in 2020 or 2021 as the direct result of temporary remote work requirements, you might not owe state income taxes – but only if there was a government-mandated or physician-ordered stay at home order due to COVID-19. However, if you continued to work from your home in Georgia after the lifting of the government mandate or physician’s order, you may now owe Georgia income tax because the requirement is no longer mandated by a federal or state government or by a physician.
If you decided to move out of Tennessee during 2022 but continued to work remotely for your Tennessee employer, you may owe state income tax to your new state. For example, if you lived in Georgia for more than 183 days in 2022, the state considers you a “resident” and imposes tax on your entire 2022 income. Conversely, if you lived in Georgia for less than 183 days, the state considers you a “part-year resident” and only taxes the income you earned while in Georgia. So as an example, if you moved to Georgia in October of 2022, you would only owe taxes on the income you earned in October, November, and December.
Please be aware that if you did not tell your Tennessee employer that you were moving to a new state, they were likely not withholding state income taxes from your paychecks. As a result, when it comes time to pay your taxes, you will owe the full amount due.
Living in Tennessee, Working for an Out-of-State Employer
During the pandemic, many people moved back to their hometowns, to the beach, or just to more tax friendly states while continuing to work for their out-of-state employers. Generally speaking, if you are a “non-resident” of your employer’s state, then you will not owe that state income taxes. For example, California defines “resident” as someone who lives in the state for at least nine months. If you moved from California to Tennessee in February 2022 and worked remotely for your California employer, you would be considered a non-resident and taxed on the two months that you lived in California. If your employer continued to withhold California income taxes from your paychecks, you could file a California non-resident return and receive a refund. Similarly, if you live in Tennessee but started a new job in 2022 working remotely for an out-of-state employer, you would likely not owe state income taxes to your employer’s state.
However, seven states have what is called the “Convenience of Employer” rule. If you decide to work from home because it is more convenient for you, but you would otherwise work in your employer’s state, then you still owe income tax to your employer’s state under this theory. States that impose a “Convenience of Employer” rule include Arkansas, Connecticut, Delaware, Massachusetts (temporarily), Nebraska, New York, and Pennsylvania. So if pre-pandemic, you had a job in New York City, but you decided to move to Tennessee for convenience, you would still owe taxes to the state of New York. This rule does not apply if you work from home because it is more convenient for your employer. To qualify, your home office must constitute a “bona fide employer office.” The New York Department of Revenue specifically enumerates criteria that you must meet for your office to be considered a “bona fide employer office,” but in short, if your employer does not advertise your home as one of their office locations, store inventory at your home, or cover your home in their business insurance policy, then you likely are not meeting this exception. If you think this exception applies to you, please consult your tax advisor. Additionally, read more details here on Tax Obligations from transitioning to a remote workforce.
Federal Income Tax Deductions for Your Home Office
In the era of working from home, some taxpayers can deduct the expenses they incur to operate their home office. However, the IRS is strict about who can deduct these expenses and what expenses qualify.
To qualify for the home office deduction, you must meet four tests: exclusive use, regular use, trade or business use, and principal place of business.
- The exclusive use test requires you to use a specific area of your home solely for your trade or business.
- To qualify for the regular use test, you must regularly use your home office in conducting your trade or business. While there is not a distinct number of hours that determines regular use, the IRS specifies that incidental or occasional business use is not regular use.
- The trade or business use test simply means that you use your home office to conduct a trade or business, as opposed to personal use.
- Your home office is considered your principal place of business if you use it exclusively and regularly for administrative or management activities and if you have no other location where you conduct substantial administrative or management activities. If your home office is not your principal place of business, it can still qualify if you meet patients, clients, or customers there or if it is a separate structure.
Even if you meet all four tests, you can only deduct home office expenses if you are a business owner, independent contractor, or an employee working from home for the convenience of the employer.
If you qualify to deduct home office expenses, there are two methods to calculate the deduction: actual expenses or the simplified method. If you choose the actual expenses method, you split all expenses relating to your home into three buckets: direct expenses, indirect expenses, and unrelated expenses. Direct expenses are incurred only for the business part of your home, and they are fully deductible. Indirect expenses, such as insurance and utilities, are deductible based on the percentage of your home used for business. Unrelated expenses that do not relate to your business are not deductible. To calculate the business use percentage of your home for indirect expenses, consider how large your home office is in relation to your entire home. The IRS allows you to use any reasonable method to figure the business use percentage.
If you elect to use the simplified method to calculate the home office deduction, your deduction is equal to $5 multiplied by the area of your home used for a qualified business use. For example, if your home office is 200 square feet, then your home office deduction would be $1,000 ($5 times 200 square feet).
As outlined in this article there may be unintended individual income tax consequences of a move during the pandemic, read here the state tax effects of the new mobile workforce. We always recommend consulting with your tax advisor for the best approach or reach out to our team of advisors at LBMC.
Content provided by LBMC Tax Managers, Alex Gomer and Rachel Vagnier.
LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.