With the COVID-19 pandemic shaking up the working world, it's definitely not abnormal to be living in one state and practicing therapy in another right now. If they aren’t choosing to see clients in person, some mental healthcare practitioners are moving locations and living in temporary housing. Some private practice therapists who used to drive to a different state for work no longer need to commute into high-traffic metro areas to get to the office (think New Jersey vs. New York).
COVID has forced therapists to handle the ways in which they work much differently, and with that, comes a natural effect on practice finances and taxation. Don't worry––just because you're living in one state and working in another doesn't mean you have to pay double to the IRS! Instead, you'll need to perfect the art of resident returns and non-resident returns.
If you're living in one state but practicing therapy and working with or seeing clients in another, here are some tips on how to file your tax return this year:
- Research "reciprocal agreements" in your state. Reciprocal agreements allow you to work in a neighboring state without having to pay taxes there, and are in place for certain states. For example, California residents do not need to pay income tax on wages they earn in Arizona. Information on reciprocal agreements and any tax forms needed for exemption can be found on your respective state’s website. (Note: reciprocal agreements only apply to wages from employment. If you're receiving income from a different state outside of employment, you'll need to file a non-resident return.)
- If reciprocal agreements don't apply to you, you will file a resident tax return and a nonresident tax return. For the state you live in, you'll file a resident tax return, which includes all of your income sources, including any income from out of state. For the state you solely work and operate your practice in, you'll file a nonresident tax return, listing only the income you made from working and seeing clients in that state. In most cases, filing in your home state will allow you to claim a tax credit for the taxes you paid to the state you work in.
This information is important to be aware of now so you can handle your taxes in the pandemic, but will continue to be important as we move into a new working world post-COVID, where practices like tele-health will be much more common. We can't wait to see what's next!
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post.