Millions of Americans are working at home during the coronavirus pandemic. You’ve created a nice backdrop of books, awards, and knickknacks to impress your colleagues during Zoom conferences. You’re also paying for the utilities and internet service you need to do your job for your employer.
A lot of readers have asked: We must qualify for a home office tax deduction, right?
Don’t get your hopes up about that tax break, said Arthur Zatz, a tax lawyer at Isdaner and Co., a Bala Cynwyd accounting firm.
Self-employed people can write off some home office expenses — many freelancers were already taking a home-office deduction before the coronavirus. But the Tax Act of 2017 eliminated a lot of individual tax breaks, including the home-office deduction for employees, Zatz said.
But there’s a glimmer of hope for employees.
Tax experts say there is a little known tax-free way for employers to reimburse workers for costs during a disaster that normally would not be eligible for reimbursement. That might include child care, commuting costs, or even funeral expenses for COVID-19 deaths. It’s getting a lot of online discussion these days by tax professionals.
More on that later.
The 2017 Tax Cut Act dramatically increased the standard deduction to $12,000 for individual taxpayers ($24,000 for joint-filers). But it eliminated a lot of deductions, including unreimbursed employee work expenses. The aim was to simplify tax preparation: About 46 million taxpayers itemized deductions in 2017. Fewer than 17 million itemized in 2018. About 90% of all taxpayers now claim the standard deduction.
If you’re an employee, the home office deduction is no longer an option.
Many self-employed workers already deduct costs for home offices. Some self-employed people who work in offices that are shut down because of the coronavirus lock down may want to explore deducting costs of working at home, tax professionals say.
If you are self-employed, you can deduct the business part of your home used exclusively and regularly for trade or business purposes, according to H&R Block. The business part of your home must be either your main place of business, the place where you meet or deal with customers, or a separate structure that you use in connection with your trade or business.
Home office deductions can get complicated. You should consult a tax professional.
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In Pennsylvania, you can write off unreimbursed work expenses on your individual state tax return. That does include the cost of the physical space in your home, if it is dedicated to your business activity, Zatz said.
Pennsylvania tax authorities have become “very formalistic” about unreimbursed employee work expenses, and spell out types of legitimate expenses, including such things as cell phones, tools, office supplies, and professional subscriptions, he said. You will need to document the expenses. It helps to get a letter from your employer indicating that the expenses are necessary and not being reimbursed.
In New Jersey, there’s no wiggle room on your state taxes. Unreimbursed employee costs are not deductible, said James B. Evans Jr., a CPA and lawyer with Kulzer and DiPadova law firm in Haddonfield.
“If you are an employee, then New Jersey doesn’t allow for any employee business deductions, so you would not be able to take a deduction for home office or other costs related to your employment,” he said.
A member of a partnership or of a limited liability company that’s taxed like a partnership might be able to take some out-of-pocket costs against income from the partnership or LLC, Evans said.
Under a law called the Stafford Act, employers can provide tax-free assistance to employees during a disaster. Typically, this is a localized event such as a hurricane. The law was also expanded after the Sept. 11, 2001, terrorist attacks. The pandemic is a nationwide emergency, so a multitude of employers might reimburse some employee expenses.
“A number of our clients have taken advantage of it for specific situations,” said John E. McGrady III, a CPA and tax lawyer at the Buchanan Ingersoll and Rooney law firm in Pittsburgh, who wrote a recent blog post about the tax provision.
Section 139 allows employers to reimburse employees for additional expenses they incur because of the emergency. A company could reimburse somebody for the cost of installing high-speed internet in their home, or a personal computer, a printer, or office supplies. They can be any “reasonable and necessary” personal, family, living, or funeral expenses incurred as a result of a qualified disaster, McGrady said.
The tax-free reimbursements are not restricted to employees working from home. A company could reimburse an essential employee for additional child care costs they incur because they need to work, or additional commuting cost they have to pay because public transit is not available, McGrady said. An employer could reimburse a worker for cleaning costs or additional laundry costs.
Documentation is also relaxed: “Individuals are not required to account to their employer for actual expenses in order to qualify for the exclusion, provided that the amount of the payments can be reasonably expected to be commensurate with the expenses incurred,” McGrady wrote in his blog post.
There are limitations. The employer can’t pay employees for expenses that would be covered by insurance. Nor can the payments replace income or constitute taxable wages — they can’t be counted as hazard pay or lost wages.
But McGrady said the payments are a “favorable and efficient mechanism to provide tax-free supplemental assistance to employees.”
Yes, you do.
The Philadelphia wage tax applies to non-resident employees who work in Philadelphia. But if an employer requires a non-resident employee to perform duties outside the city, he or she is exempt from the wage tax during that time. That applies to stay-at-home workers during the pandemic, according to recent guidance issued by the Philadelphia Department of Revenue.
An employer may choose to continue withholding the wage tax from a non-resident employee’s paycheck. In that case, non-resident employees may file for a refund in 2021, based on the number of days they worked outside the city at their employers’ direction.
You may owe taxes to your home state if you are working there now.
"If you were working in Philadelphia, but you lived in New Jersey or New York, or vice versa, which state do you pay income taxes to?“ McGrady said. “Which state you do the withholding from?”
McGrady said some states have signaled they will take a relaxed stance to telecommuting employees in the short term. But be prepared to deal with this issue if you continue to work from home. State tax revenue has plunged because of the economic slowdown. It’s reasonable to assume that state tax collectors may begin to regard stay-at-home employees as potential tax revenue sources.
“Some states are very aggressive about telecommuting in terms of sourcing income to their state,” McGrady said.
This article was updated to clarify that Pennsylvania employees can deduct some costs associated with the physical space of their home offices.