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Taxes

Working remotely? Here are 4 things to pay attention to this tax season

Remote work can complicate your taxes. Here's a simple explanation of what to watch out for.

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Jamie Grill | Getty Images

Over the last few years, the number of people working from home tripled, according to the U.S. Census Bureau.

But the freedom that comes with remote work can also cause confusion when it comes to your taxes. Depending on where you're logging in to work, you may have to navigate tax codes from different states or cities. And while working from home can save your employer from office expenses, the same can't always be said for you and your tax bill.

CNBC Select spoke with two CPAs to get their advice on what remote workers should pay attention to this tax season and how to go about preparing their taxes.

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First things first — should remote workers use tax preparation software?

Tax preparation software can give you an affordable way to streamline your taxes. If you're using self-prep tax software, just make sure you input all of the information you need for a correct filing, even if the program doesn't ask. "It doesn't know anything unless you tell it," says Michele Cagan, a CPA.

Even if you prefer using software and preparing your taxes yourself, CPA and Tax Strategist Chika Obih recommends hiring a tax professional for at least the first year you work in a state different from where you live. The same holds true if you live in different states throughout the year. That way you'll at least have a basic understanding of your tax situation that you can follow in the future.

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What remote workers need to know for tax season

You may not be able to deduct home office expenses

You may have moved your standing desk into the spare bedroom, but that doesn't guarantee it'll qualify for a home office space deduction. Your home workspace's eligibility for a tax deduction depends on your employment status and how you use the space.

The 2017 Tax Cuts and Jobs Act suspended the home office deduction through 2025 for employees who "receive a paycheck or a W-2 exclusively from an employer," according to the IRS. If you receive a Federal W-2 form from your employer then it doesn't matter if you work from home 100% of the time, 50% of the time or not at all – you can't deduct work expenses to reduce your taxable income. But according to Obih, you can ask your employer to reimburse you for office expenses, co-working space fee or whatever else you have to pay for out of pocket.

Business owners and freelancers (including contractors) receiving a 1099 form for the income they earn may be able to deduct expenses related to having a home office. But for a space to qualify for a deduction, it has to be used exclusively for business purposes. You can't just claim a deduction for your fancy new kitchen table by putting your work laptop on it. "You're using the kitchen table for other stuff too," says Cagan. "It has to really be a business space."

If you have a space in your home used solely for business, you can deduct your expenses with either the simplified option or the regular method. Which filing tactic saves you the most depends on your actual costs and the size of your home and office space.

As the name suggests, the simplified option makes calculating your deduction amount easy. You can deduct $5 per square foot of office space for up to 300 square feet (or $1,500).

With the regular method, you'll need to keep records of your eligible home office-related expenses such as homeowners insurance, mortgage interest, utilities and repairs. You'll be able to deduct a percentage of eligible expenses based on the size of your workspace. If your home office is 10% of your home's total square footage, then you can deduct 10% of the eligible expenses. There isn't a hard limit on how much you can deduct for home office expenses. However, your home office deductions cannot exceed your business' net income (the gross income it earns minus regular expenses).

How it works in real life

As an example, if you're home is 2,000 square feet and you have a dedicated office space that's 200 square feet. In this scenario, you can deduct 10% of your actual eligible expenses because that's the size of your business space in relation to your home's size. Let's assume you have the following deductible expenses:

Mortgage interest: $5,500

Real estate taxes: $2,500

Utilities: $3,600

Insurance: $1,500

Total expenses: $13,100

You could deduct a flat $1,000 using the simple method ($5 X 200 sq. ft.) or you could deduct $1,310 with the regular method, so you'd be better off using the regular method. This is assuming your home office deductions don't exceed your business profit (net income) for the year and you can deduct the full amount.

Understand the state and local tax codes where you work and live

Remote workers who live and work in different states need to pay extra attention to state and local taxes.

Typically, you'll pay taxes in the state you live in (unless that state doesn't have income taxes). But if you work in a different state, then you'll usually need to file a nonresident tax form in the state where you worked, listing the income and taxes you paid and earned in that state.

To avoid paying taxes on the same income twice, the taxpayer can credit the taxes paid in their non-resident state against their home state's tax liability (or vice versa depending on which state has higher taxes).

And filing taxes in multiple states is just one of many complications that make figuring out your state and local tax obligations so difficult. The taxes you pay and the rules for withholding taxes change depending on not just what state you live in, but what county and city. "I have a lot of colleagues who won't do Ohio taxes because there's so many weird little rules in all the different municipalities," Cagan says. A handful of states may even require you to withhold taxes if your employer is based in the state, even if you never physically work in that state.

If you're unsure how your state or local tax codes affect you, then it's a good idea to work with a local tax professional to avoid overpaying or underpaying your taxes.

Digital nomads should seek help from a tax professional

If you spent most of the year living out of a van or bouncing between Airbnbs, you probably want professional help with your taxes. Depending on where you lived, how long you were there and how much money you made, you could owe taxes in multiple states and cities, a problem athletes and entertainers have had to deal with for years.

"If you're moving state to state, talk to your tax professional, let them know your situation and then they can better advise," Obih says. This can give you peace of mind knowing that you're in compliance with local and state tax codes and won't have issues at the end of the year or even years down the road.

Contractors, freelancers and the self-employed should track all work-related expenses

If you have a side hustle, freelance gig, business venture or are otherwise an independent contractor (i.e. you receive a 1099 form for your income), you can deduct business expenses.

In addition to keeping track of your home office expenses, make sure to pay attention to any money you spend on business travel, including the miles you put on your car for business activities. You can also deduct a percentage of your phone and internet bills based on how much you use them for business. "You don't have to keep a detailed log [of your phone or internet usage] and figure out to the minute what is for business or personal use," Cagan says. "But you have to have a general sense of how much of it really is business and don't round up."

The important thing is to keep itemized receipts or detailed records of everything. Cagan even recommends taking a picture of your home office space. "You want to make sure that if ever you get audited... you have a reasonable defense for yourself," she says.

That said, don't be afraid to take deductions for legitimate expenses. Obih has seen eligible taxpayers avoid home office deductions because they're afraid it'll increase their risk of an audit. "Don't have a fear of taking the deductions and the tax credits and benefits that are available to you just because of an audit," she says.

Don't miss: Managing expenses can be a chore—these 5 apps for small business owners makes it a little easier

Bottom line

Since the start of the Covid-19 pandemic, there has been a dramatic increase in remote and hybrid work. For regular W-2 employees, working from home may have a minimal impact on your taxes, but there are plenty of situations where it can get complicated. If you work and live in different states and municipalities or if you lived in multiple states throughout the year, you may have to file state or local taxes in each jurisdiction.

Currently, W-2 employees can't deduct home office expenses, but independent contractors or anyone who is self-employed can deduct the costs of having a dedicated workspace at home. Taxes can be confusing and working remotely has the potential to add one more complication to the mix. So if you're not quite sure how to handle your taxes this year, you may be able to save money and have greater peace of mind if you work with a tax professional.

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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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