Cross-state commuters and Americans ‘working from anywhere’ face DOUBLE taxation risk – will you be caught out?

The rise of remote work after the pandemic has made working from a more exotic or cheaper state a reality for many Americans.

But the “work from anywhere” or “digital nomad” culture – which has boomed in recent years – could have unexpected and grim consequences as tax season approaches.

If you work in a place other than where you live, you may have to file an income tax return in both states – and you risk being taxed twice on your income.

Incredibly, some states, such as New York, require you to pay taxes if your employer is located there, but you choose to do the work elsewhere, such as from home in Jersey or on the beach in Miami. We’ll explain this oddly titled “convenience to the employer” rule later.

But it’s not all bad news: Some states offer reciprocity agreements with neighboring states, and others have no income tax at all.

The rules have always been there, but it’s only now that remote work has become so common — and Americans are using the advantage to work not only from home, but from other areas as well — that it’s becoming a problem, tax experts say.

Here’s everything you need to know to avoid getting caught if you worked above state lines in tax year 2023.

No problems with these income tax free states

There are nine states that do not have an individual income tax law, meaning there is no income tax burden on remote or mobile workers.

It’s good news for anyone who’s escaped to the Sunshine State to avoid the winter weather, Florida being one of them.

You also do not need to file a separate return if you worked in Alaska, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Wyoming and Washington.

The District of Columbia is also prohibited from taxing non-residents under the Home Rule Act.

Reciprocal agreements between states

Other states offer reciprocal tax agreements, meaning they do not tax residents who work in a state other than their home state.

For example, if you live in Virginia but commute across the border to Maryland for work, you do not have to pay taxes or file returns in Maryland.

Likewise, if you live in Wisconsin and travel to Illinois for work, you only have to pay taxes in Wisconsin because the two states have a reciprocity agreement.

There are currently reciprocal agreements in 15 states and the District of Columbia, according to the nonprofit National Taxpayers Union Foundation.

Earlier this year, the think tank released its Remote Obligations And Mobility (ROAM). Table of contentswhich ranks each state’s tax laws and regulatory policies on how they affect remote workers.

States with no income tax burden or states that participate in the most reciprocity agreements score the highest.

The National Taxpayers Union Foundation (NTUF) ranks each state based on how tax law affects remote and mobile workers in the Remote Obligations And Mobility (ROAM) Index

Tax credits

In the absence of a reciprocity agreement between the two states, some states may allow you to receive a rebate on taxes paid in the state where you do not live but work.

For example, if you live in California but work in Arizona, you must file an income tax return in both states to get the credit.

That means you’ll need to file a California state income tax form with all your sources of income and a non-resident tax return with just your employment income for Arizona.

According to the NTUF, this could result in commuting taxpayers paying the highest tax rate of the two states.

Submission thresholds

According to the NTUF, it is also important to check the filing threshold for the state in which you work.

Filing thresholds indicate how long a taxpayer must work in a state before filing an income tax return in that state.

Different states have different rules about the requirements taxpayers must meet before filing an individual income tax return.

NTUF’s Andrew Wilford said remotely friendly state tax policies could be beneficial to workers and employers

“In a majority of states, almost all taxpayers in that state are required to file an individual income tax return from the very first day they earn income in that state, a requirement that most taxpayers are likely not even aware of,” the report said.

In 2023, Indiana and Montana introduced new rules that require non-residents to file a tax return only if they work in the state for more than 30 days.

As a result, Indiana now ranks highest among all states with an income tax in the NTUF index.

Andrew Wilford, from NTUF, told DailyMail.com that remote-friendly tax policies could attract workers from other states, as well as employers whose employees are spread across the country.

“Indiana has accomplished both by simplifying the tax treatment of both groups – relieving remote taxpayers and their employers from the obligation to file Indiana tax returns based on a few days worked in the state, and protecting taxpayers from confusing process of filing returns in two or more states and claiming credits for taxes paid to other states,” he said.

If you work in a place other than where you live, you may need to file income tax returns in more than one state

Convenience of the employer

A handful of states also have a so-called “convenience of the employer rule.”

This means that if you work in another state for your convenience – and may be able to commute – you will owe taxes in the state where your employer is located.

This can put taxpayers at risk of being taxed twice for the same income.

Some states offer a tax credit that can offset some or all of the taxes you paid to the state where your employer is located.

For example, New Jersey offers a credit to offset the taxes its residents paid to New York because their employer was located there, despite the fact that they worked from home.

Alabama, Delaware, Nebraska, New York and Pennsylvania are imposing full convenience of employer rules – with Alabama joining this group in 2023.

New Jersey also introduced its own convenience of employer rule last year to recoup some of the tax revenue it pays out in credits.

It imposed a so-called “retaliatory version” of the rule, which applies only to residents of states that impose their own convenience rules. This will mainly impact New York residents who work in New Jersey.