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Act 14 (S.B. No. 1396) provides corrective legislation to Hawaii's estimated tax underpayment penalty and clarifies the law regarding extensions to file tax returns. This Act took effect on April 16, 2003, and applies to taxable years beginning after December 31, 2002.
Act 14 amends §§ 235-97(f), Hawaii Revised Statutes (HRS). The new law corrects an inadvertent, regressive effect on individual taxpayers with adjusted gross incomes (AGIs) of $50,000 or less, which was created by Act 190, Session Laws of Hawaii 2002 (Act 190).
Prior to Act 190 (for taxable years beginning before December 31, 2001), in order to avoid the estimated tax underpayment penalty, Hawaii law required individual taxpayers to pay the lesser of:
For taxable years beginning after December 31, 2001, Act 190 changed these payment requirements as follows:
Those individuals with AGIs of $50,000 or less were subject to a higher payment threshold than those with higher AGIs. However, the Department of Taxation (Department) recognized that the Legislature had intended to treat all taxpayers equally with respect to Act 190 and administered Act 190 to apply the lower 60% threshold to all individual taxpayers, regardless of AGI level.
Act 14 ensures that all taxpayers are treated equally, regardless of income level. For taxable years beginning after December 31, 2002, an individual taxpayer may avoid the estimated tax underpayment penalty by paying the lesser of:
Act 14 also clarifies the operation of competing provisions relating to the Department's authority to grant extensions of time to file net income tax returns.
Under prior law, § 235-98, HRS, prohibited the Department from granting extensions of time to file tax returns for a period exceeding six (6) months, with one exception for persons living outside of the United States. In no other circumstance was an extension to exceed six (6) months. However, there are federal provisions (to which Hawaii conforms) that allow the Internal Revenue Service (IRS) to grant extensions, which would exceed Hawaii's six (6) month limitation.
The following is an example of how Hawaii's six-month limitation might conflict with federal tax regulations:
A corporate, calendar year taxpayer joins an affiliated group of domestic corporations on February 16, 2001. The affiliated group elects to file a consolidated return for the 2001 tax year in lieu of each entity filing separate returns.1 The affiliated group is also a calendar year taxpayer. Because the taxpayer's income will be reported on the consolidated return when it becomes a member of the group, the taxpayer files a "short period return" upon which it calculates its tax liability for the short taxable year from January 1, 2001 through February 16, 2001 (the date on which it joined the affiliated group).
Under Hawaii law, the due date for filing the short period return is June 20, 2001 (i.e., the 20th day of the 4th month following the close of the short year, February 16th). However, federal Treasury Regulation § 1-1502-76(c)(1) allows the taxpayer in this situation to base its filing due dates on that of the affiliated group year-end (i.e., December 31st, instead of February 16th). Under the federal rules, the taxpayer's filing date would be March 15, 2002 (as opposed to the Hawaii filing date of June 20, 20012 ). If the taxpayer requests a six-month extension using the federal rules, the extension period would end on September 15, 2002. If the extension period were calculated using the Hawaii return filing due date, a six-month extension would end on December 20, 2001 (6 months after June 20, 2001). The September 15, 2002, extension period requested by the taxpayer far exceeds a six (6) month limitation prescribed by § 235-98, HRS (i.e., December 20, 2001).
The provisions of Act 14 resolve the conflict between Hawaii's strict six (6) month limitation in § 235-98, HRS, and the more flexible federal provisions in favor of conformity to the federal tax laws.
Forms and other tax information may be downloaded from the Department's website at www.hawaii.gov/tax. On Oahu, forms may be ordered by calling the Department's Forms by Fax/Mail Line at 587-7572. Persons calling from the neighbor islands or continental U.S. may call toll-free at 1-800-222-7572.