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Remote work has been soaring in popularity since the pandemic forced many workers home early last year. The trend is sweeping the nationbut as geographical lines blur, state lines have become more important than ever.
If your remote work crosses state lines, determining how much income tax to pay which state can be challenging.
Im going to do you a favor up frontif you remember nothing else from this blog post, remember to check each states policies on residence and the Convenience of Employer rule. Well go into more detail on both so you know what to look for, but brushing up on the policies of the states you deal with is going to be crucial.
Without further ado, lets walk through what you need to know about state taxes and remote work.
How Could My Companys State Claim Me As A Resident If I Dont Live There
Different states have different definitions of residency, so if youre considered a resident by a state that isnt home, youre called a statutory resident. Thats a fancy way of saying on paper, youre a resident.
Some statutory residents simply moved from one state to the other during the year. They usually pay taxes based on the months lived in each state .
For other taxpayers, just working a full-time job for a company could count towards being a statutory resident of that companys state.
Statutory residents can find themselves in a real bind. Since any state claiming them as a resident gets to tax their income, they could get taxed multiple times on the same income.
Theres hope, though. If you find yourself in this position, you can lower the odds of your employers state being able to claim you as a resident by examining the its definition of residency and distancing yourself from any qualifiers.
For example, if your employer state considers you a statutory resident if you spend more than half the year there, count days to make sure you dont cross that line.
The crucial move on your part is to check the residency rules. Once you know what theyre looking for, youll be able to strategize ways to prove you arent a resident.
One quick note: Sometimes, a state will interchangeably use part-year resident and statutory resident. Just another reason to examine the language and rules for each state.
Balance Owing On Your Tax Return
If you have an amount on line 48500, you have a balance owing.
Your 2020 balance owing is due on or before .
You should file your tax return, pay any amounts you owe, or make a post-dated payment to cover your balance owing by the due date to avoid paying interest and late-filing penalties. If your balance owing is $2 or less, you do not have to make a payment.
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If You Cannot Pay In Full
If you are not able to pay the full amount:
- file on time to avoid paying a late-filing penalty
- make a partial payment to reduce the amount of interest you need to pay on unpaid amounts
You can set up a payment arrangement to give yourself more time and flexibility to repay what you owe. For details: Arrange to pay your personal debt over time
If you are unable to pay, you can discuss your options with the CRA.
A Note On The Alternative Method
If you owe any âCommunications and Air Transportation Taxesâ and calculate those taxes based on amounts billed or tickets sold, rather than on amounts actually collected, those taxes are considered collected during the first week of the second following semimonthly period.
This is called the âAlternative methodâ of determining excise tax deposits. For more on how it works, check out page 11 of the instructions to Form 720.
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Claim Stimulus And Child Tax Credit
The $1.9trillion American Rescue Act, signed into law by President Joe Biden last March included a number of major provisions for this tax season including stimulus checks.
While most eligible Americans received their $1,400 stimulus payments, some might be owed one still including families that had a baby in 2021.
If this is the case, you can claim the recovery rebate credit on your tax return.
Another major policy change under the Rescue Act expanded child tax credits to $3,600 from $2,000.
For stimulus checks and child tax credits, the IRS will be sending a letter to those who claimed those payments in 2021.
The letters will contain key information such as the amount of money sent out.
And lastly, qualifying families who spent $16,000 on eligible expenses, might be able to claim $8,000.
This is known as the child and dependent care tax credit, which was also expanded under the Rescue Act.
How To Calculate Federal Tax Credits
Unlike adjustments and deductions, which apply to your income, tax credits apply to your tax liability, which means the amount of tax that you owe.
For example, if you calculate that you have tax liability of $1,000 based on your taxable income and your tax bracket, and you are eligible for a tax credit of $200, that would reduce your liability to $800. In other words, you would only owe $800 to the federal government.
Tax credits are only awarded in certain circumstances, however. Some credits are refundable, which means you can receive payment for them even if you dont owe any income tax. By contrast, nonrefundable tax credits can reduce your liability no lower than zero. The list below describes the most common federal income tax credits.
- The Earned Income Tax Credit is a refundable credit for taxpayers with income below a certain level. The 2021 credit can be up to $6,728 for taxpayers with three or more children, or lower amounts for taxpayers with two, one or no children.
- The Child and Dependent Care Credit is a nonrefundable credit of up to $4,000 or $8,000 related to childcare expenses incurred while working or looking for work.
- The Adoption Credit is a nonrefundable credit equal to certain expenses related to the adoption of a child.
- The American Opportunity Tax Credit is a partially refundable credit of up to $2,500 per year for enrollment fees, tuition, course materials and other qualified expenses for your first four years of post-secondary education.
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Calculating Your Tax Refund
Whether or not you get a tax refund depends on the amount of taxes you paid during the year. This is because they were withheld from your paycheck. However, it also depends on your tax liability and whether or not you received any refundable tax credits.
When you file your tax return, if the amount of taxes you owe is less than the amount that was withheld from your paycheck during the course of the year, you will receive a refund for the difference. This is the most common reason people receive a tax refund.
If you paid no taxes during the year and owe no taxes, but are eligible for one or more refundable tax credits, you will also receive a refund equal to the refundable amount of the credits.
Can Owing State Taxes Impact My Federal Taxes
State and federal taxes are completely separate. They are collected by different agencies and spent on different things. However, they can affect each other. The amount you pay in state and local taxes can be deducted on your federal return, which can be a boon in states like California. What is known as the SALT deduction has become a hot-button political issue, so you can expect it to go up and down in the years ahead.
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Paye Overpayments And Underpaymentsof Tax
An overpayment of tax happens when you have paid more tax than you wereliable to pay. If you have overpaid tax you will get a tax refund. You mustclaim a tax refund within 4 years after the end of the year of the overpaymentor you will not get the rebate. To claim tax back you must get a Statementof Liability from Revenue.
An underpayment of tax is when you have paid less tax than you were liableto pay. If you have paid too little tax you will owe Revenue the differencebetween what you actually paid and what you should have paid. You may not knowthat you have paid too little tax, but you are still responsible for payingRevenue if an underpayment of tax has occurred. If you are a PAYEtaxpayer and you are registered with Revenue’s PAYE Services you can viewyour tax credit certificate online. You can do this using Revenue’s myAccount Serviceonline or on mobile and tablet devices using Revenue’s RevApp.Your tax credit certificate will show the tax credits that your employer isdeducting from your tax bill. If you find out during the year that your taxcredits are not correct you should contact Revenue and any refund you may bedue will be paid to you by your employer. It is also important to check you arenot claiming tax credits you are not entitled to, as this will result in anunderpayment of tax.
File Your 2021 Return Even If You’re Awaiting Processing Of A Previous Tax Return
You don’t need to wait for your 2020 tax return to be fully processed to file a 2021 return.
According to the IRS, as of Dec. 3, 2021, nearly 169 million 2020 tax returns were processed — including all paper and electronic individual returns received prior to April 2021 that included a refund and did not have errors or need additional review.
“The IRS continues to reduce the inventory of prior-year individual tax returns that have not been fully processed,” Rettig said.
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Calculating Income Tax Rate
The United States has a progressive income tax system. This means there are higher tax rates for higher income levels. These are called marginal tax rates,” meaning they do not apply to total income, but only to the income within a specific range. These ranges are referred to as brackets.
Income falling within a specific bracket is taxed at the rate for that bracket. The table below shows the tax brackets for the federal income tax, and it reflects the rates for the 2021 tax year, which are the taxes due in early 2022.
Exceptions To Underpayment Of Tax Penalties
If you underpaid your taxes this year but owed considerably less last year, you typically dont pay a penalty for underpayment of tax if you withheld at least as much as you owed last year. That, of course, is only true if you pay by the due date this year.
TaxAct can help determine if the safe harbor rule reduces your penalties and interest. Simply enter last years tax liability and the software will do the calculations for you.
You may also reduce your penalties and interest using the annualized income method if you received more of your income in the latter part of the year.
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Calculating Taxable Income Using Exemptions And Deductions
Of course, calculating how much you owe in taxes is not quite that simple. For starters, federal tax rates apply only to taxable income. This is different than your total income, otherwise known as gross income. Taxable income is always lower than gross income since the U.S. allows taxpayers to deduct certain income from their gross income to determine taxable income.
To calculate taxable income, you begin by making certain adjustments from gross income to arrive at adjusted gross income . Once you have calculated adjusted gross income, you can subtract any deductions for which you qualify to arrive at taxable income.
Note that there are no longer personal exemptions at the federal level. Prior to 2018, taxpayers could claim a personal exemption, which lowered taxable income. The tax plan signed in late 2017 eliminated the personal exemption, though.
Deductions are somewhat more complicated. Many taxpayers claim the standard deduction, which varies depending on filing status, as shown in the table below.
What Happens If I Miss The Tax Deadline
If you are owed a refund, there is no penalty for filing federal taxes late, though this may be different for your state taxes. Still, it’s best to e-file or postmark your individual tax return as early as possible.
If you owe the IRS, penalties and interest start to accrue on any remaining unpaid taxes after the filing deadline. The late-filing penalty is 5% of the taxes due for each month your return is behind, with fees increasing to up to 25% of your due balance after 60 days have passed. You may also incur a late-payment penalty, which is 0.5% of the taxes due for each month your return is late, with penalties increasing to up to 25% of your unpaid tax, depending on how long you take to file.
Another caveat: If you’re serving in the military — in a combat zone or a contingency operation in support of the armed forces — you may be granted additional time to file, according to the IRS.
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What’s The Deadline For Filing Your 2021 Tax Return With The Irs
The deadline for filing federal taxes for most taxpayers is Monday, April 18, 2022. That’s because April 15 is recognized as a holiday, Emancipation Day, in Washington, DC.
“By law, Washington, D.C., holidays impact tax deadlines for everyone in the same way federal holidays do,” according to a statement from the IRS.Taxpayers in Maine and Massachusetts, however, have until April 19, because of the observance of Patriots’ Day in those states.
The IRS expects more than 160 million individual tax returns this year, with the vast majority coming before the April deadline.
How Much Do I Have To Make To Owe Taxes
The upside of having to pay taxes? It means you make enough money to have Uncle Sam want a cut. Congratulations!
The Internal Revenue Service sets a minimum income on which it will collect taxes. Unfortunately, its not a simple one-size-fits-all threshold. In general, how much you can make in a year before you face a tax bill depends on a few factors: your filing status, your age, and whether youre being claimed as a dependent.
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Estimated Tax Payment Options
Use the following options to make estimated tax payments. For more information about filing requirements and how to estimate your taxes, see Individual Estimated Tax Payments.
Online, directly from your bank account
- Log in to your online services account to schedule all 4 quarterly payments in advance.
- Dont have an account? Create one now.
Not ready to create an account? Use eForms – make sure to choose the correct voucher number for the payment you’re making.
- Individual estimated payment: 760ES eForm
ACH credit
Pay by ACH credit and initiate sending payments from your bank account to Virginia Tax’s bank account. See our Electronic Payment Guide for details on requirements and set-up with financial institutions, which may include fees.
Pay using a credit or debit card through Paymentus . A service fee is added to each payment you make with your card.
Check or money order
Mail the correct 760ES voucher for the tax period to:
Virginia Department of Taxation
Capital Gains Tax Rates
Taxes you’ll pay in 2021, to be filed on your 2022 tax return.
Note that you only have to pay capital gains taxes on realized gains, which is the value you receive after selling or exchanging an asset. If you hold onto an asset and it increases in value, but you don’t sell it, then the asset’s new value is considered an unrealized gain and isn’t subject to tax.
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Electronic Federal Tax Payment System
You can also pay your tax bill using the government’s Electronic Federal Tax Payment System . You’ll use your Social Security number or Individual Taxpayer Identification Number , a personal identification number , an internet password, and a secure browser to make a payment through this system. It can take up to five days to process your enrollment in this service, and you can complete the initial paperwork online or over the phone. With EFTPS, you can schedule payments up to 365 days in advance, and you’ll receive an immediate confirmation upon payment.
Don’t Think Of Your Refund As ‘found Money’
“This isn’t something you want to use to, like, splurge on a big vacation with,” said Buhrmann. “Consider building up that emergency fund or paying down consumer debt, setting aside for retirement or your kids’ college tuition. If you need a reminder about what a crisis can look like, think back to March 2020.”
For more on filing a 2021 tax return, learn how to set up an account on the IRS website and how to file on your phone. And here’s if you have to declare Venmo payments from friends.
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Calculate Your Income Tax Impact
Remember, this isn’t about figuring out what you’ll owe or what refund you’ll get. This is about figuring out how much your business earnings will increase your taxes .
The whole point of steps 3 and 4 are to get an idea of what your tax bracket will be and what part of your business profits are taxable. And at what percent.
What we’ll do is estimate an income tax amount based on the information you provided. We’ll also figure out what the tax would be without your business income. The difference is your income tax impact.
