By Riley Adams, CPA,
Kiplinger
Because of COVID-19, millions of people no longer go to the office but work
from home instead, where they’ve had to set up workstations with desks,
printers, high-speed internet and other pricey items — often paid for out of
their own pockets. Can they deduct those expenses on their taxes?
Many other workers have temporarily (or maybe permanently) fled expensive big
cities for cheaper, more remote locations, often sporting lower taxes.
What does that mean for their tax returns?
COVID-19 has changed everything this year for American workers. Some
changes have been good on the pocketbook, such as reduced expenses on
commuting, lower auto insurance premiums and less money going toward work
clothes and lunches. Others have presented some new financial challenges:
things like higher utility expenses, buying a faster internet plan with a new
Wi-Fi router to handle the upsized bandwidth, office furniture and equipment
and anything else to enable your remote working. After the challenging year,
it would be nice to know whether these expenses can at least be deducted on
your tax return.
In short, your eligibility to claim these expenses as deductions largely comes
down to one question:
Are you an employee or an independent contractor? Sadly, for employees now forced to work from home, the Tax Cuts and Jobs
Act eliminated deductible expenses tied to maintaining a home office. On the
other hand, independent contractors are in luck.
This article will walk through the tax treatment of home office-related
expenses for employees and contractors as well as differences in taxes for
those who relocate, permanently or temporarily, while working from home.
Employees Miss Out
After tax reform became law at the end of 2017, employees lost the ability to
deduct expenses related to maintaining a home office. Previously, employees
could claim an itemized deduction for unreimbursed business expenses that
exceeded 2% of their adjusted gross income. This included any work-related
expenses for business you conduct at home. For employees, those deductions are
now gone.
Despite this unfavorable rule change, employees still need supplies and
equipment to function effectively in their jobs at home. In a standard work
environment, the employer provides these necessities. Now, many employees
working from home will need to procure these items for themselves. If you find
yourself in this situation, you face one of three outcomes with respect to the
financial and related tax implications:
- Your employer purchases the items and provides them to you.
- You purchase items and receive reimbursement from your employer.
- You purchase items and do not receive reimbursement.
In the first situation, these items would qualify as an employer-owned supply
and thus would be a deductible expense on their tax return. Assuming the
employer provides these supplies and equipment for
noncompensatory business reasons, employees will not need to pay taxes on these items. This includes items
that employees may also have available for personal use, such as a cellphone
or computer, because the IRS deems these as “de minimis fringe benefits.”
The second situation is similar. If the expenses count as “ordinary and
necessary,” or those which your industry considers commonly accepted for
conducting your trade or business, these reimbursements will not count as
taxable income to the employee. To avoid having employees count these expenses
as taxable income, employers should lay out an “accountable plan,” or a set of
policies that state what qualifies for reimbursement when employees need to
purchase supplies and equipment at home.
In the final situation, employees purchase the needed supplies and equipment
but have no expectation of receiving reimbursement from their employers. Prior
to the Tax Cuts and Jobs Act, if these expenses exceeded 2% of employees’
adjusted gross income, they could claim these deductions on their tax return.
This would offset some of the expense picked up by employees. Unfortunately,
that’s no longer true. No federal tax benefits exist at the moment.
Independent Contractors Get a Break
For independent contractors who buy home office equipment and supplies without
being reimbursed, the tax picture is brighter. Independent contractors often
have no expectation of reimbursement from their contracting company. As a
result, people working in this capacity have access to self-employment tax
deductions to lower their taxable income. They can also claim expenses such
as depreciation on certain types of property, utilities, insurance and
more.
In the event a company provides equipment to the independent contractor or
reimburses expenses, these items would fall under the first and second
situations above, respectively. This allows the company to claim these
expenses as deductions on their business tax return, not the contractor.
Relocating to Pocket Tax Savings
Given the fact that many people can work from anywhere these days, it might
not be news that many people have decided to relocate from higher cost of
living areas to cheaper areas. Doing so might allow you to keep more of what
you make through lower costs or tax savings.
In the event you’ve decided to relocate permanently to a locale different from
the one you started in 2020, you might face a complex tax situation come 2021.
If you’ve made a permanent move, you will need to file a tax return in both
states this coming year. Going forward, you will only need to file a tax
return in your new state as you would in any event where you move across state
lines permanently. My wife and I relocated permanently prior to the pandemic,
reasoning we stood to have a better quality of life elsewhere. In 2019, we
paid state income taxes in Louisiana and California on account of living in
both states a roughly equal amount of time during the year (we moved in
mid-June 2019).
If you stay away longer than six months on a temporary relocation, you will
likely face a tax obligation in your home state as well as your temporary
location. That means you may be required to file tax returns in both states.
You may want to consider consulting with a tax professional to understand the
tax ramifications fully.
Given the substantial drops seen in tax revenues across the nation, states
will be keeping a close eye out for people trying to game the system by
claiming to have moved to a lower-tax state permanently or have chosen to make
it their primary residence when they really haven’t. States look
for definitive links connecting the state and the resident. Such examples
could include individuals establishing residency, owning or leasing
residential property assets that produced income, making money from a job, or
engaging in some other financial arrangement tied to a location. Saying you
have permanently relocated will require you to prove your change of scenery
comes as more than just a transitory decision. Most locations will require you
to document this change by living in your new location for at least 183 days.
You can back this up by officially changing items like your voter registration
and driver’s license.
Bottom line, because states will be keen to review any relocations, you will
want to take extra precautions when it comes to legitimizing your relocation
in the name of saving on taxes.
Now, if only employees could deduct those moving costs alongside their
work-from-home related expenses. Sadly, tax reform put an end to claiming both
as an employee.
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