Connecticut passed a Covid-19-relief tax law to help commuters working from home during the … [+]
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Some 110,000 Connecticut telecommuters will be spared from double taxation on their wage income for 2020, thanks to a Covid-19-relief tax bill that Governor Ned Lamont signed into law today.
“It lets Connecticut residents off the hook for Connecticut taxes if they were in Connecticut working because their New York [or Massachusetts] offices were closed during the pandemic,” says Mark Klein, a tax lawyer with Hodgson Russ who specializes in state tax matters.
At least the new law gives these Connecticut taxpayers relief and certainty for filing their 2020 tax returns due this April 15. But what about 2021? That’s an open issue. New Hampshire is asking the U.S. Supreme Court to hear a case on the state taxation of nonresidents that could change the whole system.
For now, Connecticut legislators put in a quick fix. Connecticut residents who used to commute to work in offices in New York and Massachusetts but worked from home in 2020 because their offices were closed due to the Covid-19 pandemic will get a tax credit on their Connecticut tax return for income taxes paid to the other state, under a rescue plan that’s dubbed “An Act Mitigating Adverse Tax Consequences Resulting From Employees Working Remotely During COVID-19.” The Senate passed the bill 28-7 on Monday, following the House’s vote of 124-44 last week. That puts these workers on par with telecommuters who get the tax credited because they work at home for their convenience.
Connecticut used to make telecommuters pay the double tax—tax to both Connecticut and their employer’s state—until 2019. Starting with the 2019 tax year, Connecticut allowed telecommuters who were working in Connecticut on their terms “for their own convenience” to take a credit for state income tax paid to other states with “convenience” rules. For a high income taxpayer who pays at the top state rates, New York would get the full 8.82%, and Connecticut would reimburse them via a credit of up to 6.99%. In the case of a Connecticut telecommuter working in Massachusetts, Massachusetts would get its full 5%, and Connecticut would get the remaining 1.99%.
“It’s giving away cash to New York [and Massachusetts] and it’s giving a break to Connecticut residents—also known as voters,” says Klein. If the credit did not apply, Connecticut residents would owe approximately $300 million in additional personal income tax payments for the 2020 income year, according to the state Office of Fiscal Analysis note.
The pandemic has raised the issue of taxation of nonresidents to a new level, and New Hampshire is asking the U.S. Supreme Court to weigh in the case of New Hampshire v. Massachusetts. The Massachusetts Department of Revenue decided to start taxing 84,000 New Hampshire residents and former commuters (now telecommuters) who worked for Massachusetts companies. New Hampshire cried foul. “Massachusetts cannot balance its budget on the backs of our citizens, punish our workers for making the decision to work from home and keep themselves and their families and those around them safe,” said New Hampshire Governor Chris Sununu when he announced the lawsuit last October, calling Massachusetts’s tax grab unconstitutional. The New Hampshire reply brief in the case puts it this way: “Massachusetts has radically redefined what constitutes Massachusetts-sourced income in order to tax earnings for work performed entirely outside its borders. This does not maintain the status quo. It upends it.”
Klein’s take: “Massachusetts decided to exploit the crisis.” Connecticut is among several states that have chimed in, siding with New Hampshire. A New Hampshire win could be a big boon to those state’s coffers.
There are already workarounds to avoid the New York state tax bite. Klein says that he’s had Connecticut clients successfully petition their New York-headquartered employer to assign them to a satellite office in Connecticut, instead of listing them as based out of the New York City office. Others, who work out of states with a convenience rule, have moved to Florida and had their companies set them up with small offices there.
The new Connecticut law also assures out-of-state businesses that they’re safe from the Connecticut tax collector. The basic rule is that states can’t tax out-of-state businesses if they’re not physically located there. But what if their employees work there and have employer-issued computer equipment there? For 2020, Connecticut says that the state won’t treat an employer as being subject to Connecticut tax just because a worker is working remotely from the state because of Covid-19. “Connecticut will pretend you’re not there,” Klein says.