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RE: Act 223, Session Laws of Hawaii 2002 (Act 223), Relating to Conformity of the Hawaii Income Tax Law to the Internal Revenue Code
Act 223 complies with Hawaii Revised Statutes (HRS) § 235-2.5(c), which directs the Department of Taxation (Department) to submit to each regular session of the Legislature, a bill to conform to subtitle A, chapter 1 of the Internal Revenue Code (IRC) as it applies to the determination of gross income, adjusted gross income, ordinary income, and loss, and taxable income.
Act 223 conforms to many of the provisions of the Economic Growth And Tax Relief Reconciliation Act of 2001 (EGTRRA), but does not conform to the Job Creation and Worker Assistance Act, which was signed by President Bush on March 9, 2002.
The adoption of the amendments to the IRC sections for State income tax purposes assures continued State conformity with federal income tax law and minimizes taxpayers’ burdens in complying with Hawaii’s income tax law. For conformity purposes, the federal effective dates for amendments to operative IRC sections are adopted.
EGTRRA made substantial changes to federal income tax law. While Act 223 conforms to many of those changes, Act 223 does not conform to the following EGTRRA provisions:
Deduction for Qualified Higher Education Expenses - Act 223 does not conform Hawaii’s income tax law to IRC § 222, which permits taxpayers to take an above-the-line deduction for qualified higher education expenses paid by the taxpayer during a taxable year.
Dependent Care Credit - Hawaii’s income tax law does not conform to IRC § 21, relating to the federal credit for expenses for household and dependent care services necessary for gainful employment. EGTRRA amended the federal credit by raising the amount of expenses eligible for the dependent care credit from $2,400 to $3,000 (for one child) and from $4,800 to $6,000 (for two or more children); increasing the maximum credit from 30% to 35% (under pre-EGTRRA law the credit amount ranged from 20% to 30%); and increasing the income levels at which the credit begins to phase-out.
Hawaii has its own credits, including a credit similar to this federal credit in HRS § 235-55.6. The amounts of expenses eligible for the credit in Hawaii’s law are the same as the pre-EGTRRA law. The Hawaii credit ranges from 15% to 25%.
Act 223 conforms to the following education incentives:
Act 223 conforms to the following pension and individual retirement accounts provisions:
Education IRAs - The prior limit for contributions is increased from $500 to $2,000; the definition of qualified education expenses that may be paid tax-free from an education IRA is expanded to include qualified elementary and secondary school expenses.
Qualified Tuition Programs - The definition of "qualified tuition program" is expanded to include certain prepaid tuition programs established and maintained by one or more eligible educational institutions (which may be private institutions); distributions from qualified state tuition programs are excluded from income to the extent that the distribution is used to pay for qualified higher education expenses.
Exclusion for Employer Provided Educational Assistance - The exclusion for employer-provided education assistance for graduate education is extended and made permanent for both graduate and undergraduate education for courses beginning after 2001.
Act 223 conforms to other provisions in EGTRRA including the following:
Individual Retirement Accounts (IRA) - The prior contribution limit for an IRA is increased from $2,000 to $3,000 for 2002 through 2004; $4,000 for 2005 through 2007; and $5,000 for 2008.
Qualified Retirement Plans (Pensions) - The prior contribution limit of $35,000 for defined contribution plans is increased to $40,000; the prior annual benefit limit of $140,000 for defined benefit plans is increased to $160,000; individuals age 50 or over can make catch-up contributions; the contribution limit on elective deferrals under a § 401(k) plan is increased to $11,000 in 2002; the dollar limit on deferrals for § 457 plans is increased to $11,000 in 2002, and is increased in $1,000 annual increments thereafter until the limit reaches $15,000 in 2006.
Rollovers of Retirement Plan and IRA Distributions - Distributions from qualified retirement plans, § 403(b) annuities, and governmental § 457 plans may be rolled over to any of such plans; distributions from an IRA may be rolled over into a qualified plan, § 403(b) annuity, or governmental § 457 plan; after-tax contributions may be rolled over into another qualified plan or a traditional IRA; surviving spouses may roll over distributions to a qualified plan, § 403(b) annuity, or governmental § 457 plan in which the spouse participates.
Purchase of Service Credit Under Governmental Pension Plans - Participants in a state or local governmental plan are not required to include a direct trustee-to-trustee transfer to a governmental defined benefit plan from a § 403(b) annuity or a § 457 plan in gross income if the transferred amount is used to purchase permissive service credits under the plan or to repay contributions and earnings with respect to an amount previously refunded under a forfeiture of service credit under the plan.
Treatment of Employer-Provided Retirement Advice - Qualified retirement planning services provided to an employee and his or her spouse by an employer maintaining a qualified plan are excluded from income and wages.
Act 223 does not conform to the Job Creation and Worker Assistance Act (JCWAA)
Income Tax Treatment of Certain Restitution Payments To Holocaust Victims - Amounts paid after 1999, as restitution payments made to an eligible individual (or the individual's heirs or estate) are excluded from gross income.
Section 3 of Act 223 amends HRS § 235-2.4 (relating to operative IRC sections for which the State provides specific treatment) to provide that the additional tax imposed by IRC § 529(c)(6) shall not be operative for purposes of Hawaii income tax law; however all other provisions of IRC § 529 relating to qualified tuition programs are operative.
Act 223 does not conform Hawaii’s income tax law to the JCWAA (Pub. L. 107-147) which was signed by President Bush on March 9, 2002. The JCWAA includes a bonus depreciation deduction, an expansion of the net operating loss (NOL) carryback period from two to five years for NOLs in the 2001 or 2002 tax years, special tax benefits for the area of New York affected by the terrorist attacks, provisions to close a loophole used by shareholders of bankrupt S corporations and sanctioned by the Supreme Court and extends for two years certain tax provisions that had expired at the end of 2001.
Further guidance is provided in Department of Taxation Announcement No. 2002-05, dated May 14, 2002.
For a complete listing of the conforming and non-conforming items, please refer to our digest of the 2001 federal tax laws which may be obtained from our website.
Current forms and other tax information are available at the Department’s website at: http://www.hawaii.gov/. On Oahu, forms may be ordered by calling the Department’s Forms Request Line at: 587-7572. Persons who are not calling from Oahu, may call: 1-800-222-7572 (toll-free) to receive forms by mail or by fax.
HRS Section Explained: HRS Sections 235-2.3, 235-2.4.
MARIE Y. OKAMURA
Director of Taxation