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You might owe more money on your taxes if you moved to a new state last year. Here's why

If you moved because of COVID-19 last year, you may be faced with several challenges when filing your taxes -- from double taxation to finding out you paid taxes in the wrong state in 2020.

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Don't forget the new tax deadline is May 17.

Sarah Tew/CNET

Filing taxes has been messy for taxpayers this year: Many had to claim missing stimulus payments on their tax returns or file their 2020 taxes so they could receive their plus-up payments from the third stimulus check. In addition, filing taxes is one of the main ways the IRS knows your current situation so it can send you child tax credit payments. But if you moved to another state last year because of the COVID-19 pandemic, that adds another set of issues to your tax return. 

Many people don't realize that if you're working remotely from another state, you're supposed to pay and file taxes in that state. For example, if you moved from Indiana to New York to stay with family, money you earn while you're living in New York (even if you're working remotely for a company in Indiana) would be considered taxable New York income.

The tax filing deadline is now May 17, but if you feel like your tax situation is complicated and you need more time, you may consider filing a tax extension to get everything sorted out. That would move your new tax filing deadline to Oct. 15. Here's what you need to know about how moving in 2020 could affect your taxes. 

You might have to file and pay taxes in more than one state

Did you know that if you work in another state for even just a day, the IRS expects you to also file your taxes in that state? I didn't until I spoke with an expert. Jared Walczak, vice president of state projects at the Tax Foundation, said even if you're just checking a work email while on vacation, you could "have the obligation to file your taxes in that state." H&R Block notes that if you're filing in multiple states, how you file will depend on things like the states involved and which state is considered the source of income.

Here's where it gets complicated: the "convenience rule." This is where a state can tax you wherever your office is located, even if you're not currently working in that state, according to Walczak. At this time, seven states use the convenience rule -- Arkansas, Connecticut, Delaware, Nebraska, New York and Pennsylvania already had this rule before the pandemic, and Massachusetts is temporarily implementing this rule due to the pandemic.

If you've been working remotely in another state due to the pandemic, you could be subject to taxes in the state where your office is located if it follows the convenience rule. However, you'll also be responsible for paying taxes in the state you're currently living and working in, Walczak said. This results in double taxation, which many states typically try to avoid by offering a tax credit to reduce tax liability. 

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There's also the case of Comptroller of the Treasury of Maryland v. Wynne that specifies that two states cannot tax someone on the same income. However, there's this clause: "When more than one state could plausibly tax the same income, each state may tax only its fair share of that income." Each state has different rules, like reciprocity agreements, so your situation could vary.

What's the deal if I moved to a state that doesn't tax personal income?

The answer might depend on whether it's a permanent or temporary move. 

"If you still have a domicile in a state with an income tax, that state will tax you on all your income for the year," Walczak said. For example, if your home is in California, but you're living in Florida with your parents, you'll still have to pay California taxes. However, if you established a domicile in Florida, you would only have to pay the California income taxes for the months you lived in the state.

The same rule applies to people who move to a state that does tax personal income. For example, if you moved from Florida to California (and established a domicile), you would need to pay California taxes, starting from the time you moved there.

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You may have to pay taxes to an additional state.

Sarah Tew/CNET

What if I live between two different states throughout the year?

If you're fortunate enough to have multiple homes in different states, each state you live in is going to look at the time you spend there each year. In this case, they'll use the six-months-and-one-day rule (also known as the 183-day rule) to determine where your legal residence is. (While you can have multiple residences, you can only have one domicile.) 

States, however, can get pushy when it comes to the domicile issue. Even if you spend more time in a state without an income tax, Walczak says other states could base your domicile on things like where your primary doctor is located, the address you've got on your insurance forms or your driver's license and even the church you attend to determine whether you're really a resident of another state.

Some people might be able to deduct their moving expenses. Here's how to find out if you can

The vast majority of people can't deduct any moving expenses. This is because the moving expense deduction is temporarily suspended due to the Tax Cuts and Jobs Act of 2017. Therefore, if you moved due to pandemic-related reasons, you won't be eligible to deduct moving expenses.

However, if you moved due to a military-related issue, visit the IRS page on deducting expenses and take the assessment to determine if you're eligible. Before you begin, you'll need to know the types and amounts of moving expenses, as well as the amount of moving expense reimbursements. We recommend having your receipts handy.

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Taxes will be complicated for many this year.

Angela Lang/CNET

Will the IRS be involved in state relocations for someone who moved during the pandemic to lessen the tax impact?

No, this isn't a focus for the IRS, according to Walczak. "Federal tax liability will not change because you move states. It's a state question," Walczak said. "People are allowed to move and make economic decisions to reduce tax liability." 

Again, the state from which you moved could be aggressive about determining whether you actually moved, but the federal government would not. The issue that arises is that for those who did unexpectedly move during the pandemic to be with family, they likely didn't consider the tax implications, like double taxation. 

If you're going to continue living in another state, update your tax withholding information with your employer now, if you haven't already, as penalties could weigh on you if you don't. However, it's possible that some states could be forgiving of mistakes due to the pandemic. 

If you've been paying taxes to the wrong state because you haven't updated your withholding information, here's something you need to be aware of. You'll need to pay taxes to the state you're currently residing in, but you should get a significant refund from the state you're overpaying to, Walczak said -- however, you could end up paying into the state you're living in before you get the refund from the other state.

If you're unsure of your tax situation, it may be in your best interest to speak with a tax adviser.

For more tax information, here's how to track your tax refund after you file and why you should set up direct deposit.

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