Will working from home affect your 2020 taxes?
As the COVID-19 pandemic kicked into high gear in the United States in 2020, many people who normally commuted to offices each day suddenly found themselves adjusting to working from home full-time. It was a huge change for the U.S. workforce — the Federal Reserve of Dallas says that of those employed in May 2020, 35% were working from home. By comparison, only 8% of full-time employees worked from home in the pre-pandemic month of February 2020.1
If you’re one of the many who started working from home for the first time last year, you may be wondering — now that tax season is upon us — if it will impact your 2020 taxes in any way. The short answer is: probably not…but maybe.
For many people, the shift to working from home won’t have any impact on taxes. That’s largely due to the Tax Cuts and Jobs Act (TCJA) of 2017, which changed the rules around deducting the costs of home-office expenditures for employees. Prior to the 2018 tax year, if you were an employee but maintained a home office or incurred other job-related expenses — for staples, mileage, printer ink, or anything else you needed to perform your duties outside of the office — you could deduct those costs on your taxes. The TCJA changed all that; for tax years 2018 through 2025, employees can’t deduct any job-related expenses.2
However, if you’re an independent contractor or self-employed, you may still be eligible for those deductions. If you aren’t sure whether the IRS would consider you a contractor or an employee, the test is fairly simple. If you get a W-2 from your employer at the end of the year — meaning that you had taxes withheld — you’re an employee. If you’re a contractor or self-employed, you don’t have taxes withheld and receive a 1099 instead. And while this may be obvious, it’s worth noting that working from home in and of itself does not make you self-employed.
If you are a contractor or self-employed person who worked on-site at your client locations, and you were shifted to work from home in 2020, it’s a different story. You may be able to deduct the cost of items you bought to perform your job, as well as the cost of maintaining a dedicated office space in your home. However, you can only deduct items you used solely for business purposes. For example, if you bought a printer that you sometimes use to print dinner recipes, you can’t deduct it. Only items that were used exclusively for business are eligible for the deduction.
The same goes for taking the home office deduction – that space must have been used exclusively for your job. If you work at a desk in a bedroom, but you also occasionally watch TV in that room, the IRS no longer considers it a deductible home office. It is important to note that your “home office” doesn’t have to be an entire room. If you carved out a corner of your living room and you only used that space for work (for the entire year), that space may be deductible even if the whole room isn’t. This is important because the deduction you can take is based on the square footage of your home office. Read up on the IRS rules about home-office deductions to learn more. Calculating the home office deduction is complicated, and the benefit received may not be significant enough to justify going through the effort. But it can be worth looking into. The best way to know for sure about what you can or can’t deduct is to consult with a tax professional.
Another potential issue arising from the nationwide uptick in working from home involves people who live in one state but work in another. Though every state has its own rules, in most cases such people would only pay state taxes in the state where they work. However, if this situation applies to you and you spent most of 2020 working at home, the situation with your state taxes may be more complicated than usual. Some states have reciprocity agreements with other states that address this exact situation, but others are less clear. It’s possible you may owe taxes in both states. Fearing a loss in revenue, several states in the Northeast are currently arguing over how reciprocity will work in this new environment.
For some people, the situation could be even more complicated. Let’s say you live in Kansas and work just across the border in Missouri…but since you were able to do your job from anywhere, you spent six weeks with family in Arizona. You now have three states to consider. This situation may not be common, but if it applies to you, there’s some additional complexity to assess.
Keep in mind, it’s possible that the situation could work in your favor: if your home state has a lower tax rate than the one(s) in which you worked, you may lower your tax burden. City and local taxes are a concern as well. You may be entitled to apply for a refund of city taxes withheld if you keep track of the days you work outside of the city that is imposing the tax. Check with your city to see what their procedure is for obtaining refunds if you think this applies to you.
Again, the best way to address these issues with certainty is to consult a tax professional who can help you understand the current laws and how they apply to your situation. Be proactive and have the discussion now, or early in filing season, so you won’t have to rush at the filing deadline. Hopefully, your taxes aren’t any more complicated than usual due to working from home, but if they are, a little planning and some professional help will go a long way.
Caution: Employers, states and cities are grappling with the complexities caused by the huge wave of employees leaving their offices and working remotely from home. In many cases, current laws do not adequately address the situation. Employers may be continuing to withhold state and local taxes from your pay, as usual, due to lack of guidance. So, when it is time to file your 2020 income tax returns, examine your Form W-2 carefully and check the status of state and local laws, as applicable to your circumstances.
Commerce Bank does not provide tax advice or legal advice to customers. Please consult your tax advisor regarding tax implications related to your specific financial situation.
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2 Source: Tax Cuts and Jobs Act of 2017, page 35 (Sec. 11045, Suspension of Miscellaneous Itemized Deductions)