Switching from office life to working from home can be a major adjustment ― not just mentally, but financially, too. You’re using more electricity, eating through more groceries and relying on a stable, fast internet connection to get your work done.
Unfortunately, if you are working from home as a W-2 employee ― that is, your wages are paid through payroll and your employer withholds taxes ― there’s not much you can claim on your tax return, according to Christina Taylor, head of operations at Credit Karma Tax. And depending on what state you live or work in, you might actually owe taxes. Here’s why.
Can you take the home office deduction?
Your home may very well double as your office these days. But unless you meet a specific set of rules, you won’t be able to claim the home office deduction on your 2020 taxes.
Thanks to the Tax Cuts and Jobs Act (TCJA), which went into effect in 2018, the home office deduction was suspended for employees until 2025. “The home office deduction is only available to those who are self-employed or work in the gig economy and use a portion of their home regularly and exclusively for their business,” Taylor said.
If you are eligible to take this deduction, there are two different methods for calculating it: the simplified option and the regular one. The simplified option allows you to deduct $5 per square foot for the area of your home exclusively used for your work (up to 300 square feet). The regular method allows you to deduct a percentage, based on the costs associated with maintaining your home, such as mortgage interest, utilities, etc.
If you’re thinking about starting a side gig, Taylor said you can set up a home office for that business and claim the home office deduction ― even if you are a W-2 employee at your day job. Keep in mind that setting up a desk in your kitchen won’t work; the space must be “regularly and exclusively” used for your side gig. It also needs to be the principal place of your businesses.
If you plan to claim this deduction, Taylor said you should keep any receipts pertaining to that space. It’s also a good idea to track your receipts in software or a spreadsheet as you go. “That way, you’ll have those values documented over the course of the year and won’t be left scrambling come tax season.”
Taylor added that even if you won’t be able to claim the home office deduction, your employer may reimburse you for a portion or all of your home office expenses. “Check your employer’s handbook and policies to see if there is an allowance for home office expenses or other work from home expenses you may be incurring.”
Can you write off utilities like electricity and the internet?
Maybe you don’t have a dedicated home office, but you are paying for utilities needed to get your job done effectively that your employer doesn’t reimburse. Again, you’re probably out of luck when it comes to writing off those expenses.
The TCJA also suspended the whole category of “miscellaneous itemized deductions,” which includes unreimbursed employee expenses, according to Morris Armstrong, founder and owner of Morris Armstrong EA. That means the additional costs a person may have incurred due to working from home, as well as other miscellaneous deductions that were subject to the 2% rule, are not deductible in most cases.
“Keep in mind that this applies to employees and not to the self-employed,” Armstrong said. If you’re self-employed, you can still write-off expenses related to running your business using a Schedule C.
You could end up getting double-taxed.
Armstrong said the bigger issue may be what state you ultimately owe taxes to. That’s because if you live in one state, but telecommute for an employer that is based in a neighboring state, that other state has a right to tax you on your salary, he said. In some cases, you could end up being taxed at a higher rate or even double-taxed.
You’re in the clear if your home state has a reciprocity agreement with a neighboring state, as you would be allowed to pay income tax to the one where you live, not where you work. For example, the state of Arizona has a reciprocal tax agreement with California, Indiana, Oregon and Virginia. Maryland has an agreement with Pennsylvania, Virginia, Washington, D.C., and West Virginia.
If your home and work states don’t have a reciprocity agreement, you might be allowed to split your income taxes between the two by paying taxes to your resident state for income you earn while working from home, and paying taxes to your employer’s state on days you go into the office. Of course, if you are working exclusively from home, this doesn’t apply.
But things can get tricky if you live in one state and your employer is based in Delaware, Nebraska, New Jersey, New York or Pennsylvania. In this case, you have to pay income taxes to your employer’s state unless you can prove that working from home is a “necessity” and not just for your own convenience.
Though a global pandemic might seem like a pretty solid reason to work from home, in this unprecedented situation the rules aren’t clear. Generally, it can be tough to qualify under the convenience vs. necessity test, and it’s up to a state’s discretion whether you do.
Your home state may also decide to tax the income you earn while working from home, even if your employer’s state also taxes you. Many states do provide a credit for any taxes due to another jurisdiction, but not in all situations. That means you could end up being double-taxed.
“It is very important that if you work in one state and live in another, you maintain meticulous records on where you were for each day,” Armstrong said. “States will be doing everything they can to collect revenue to make up for any shortages.”
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