December, 1995

TAX FACTS NO. 95-2

A brand new form will soon be here! It's Form N-11, Hawaii's new, one-page income tax return designed for individuals who file federal tax returns. This issue of TaxFacts is devoted to answering questions about the new form.

Why did the Department introduce this form?

Most taxpayers who file Hawaii tax returns also file a federal return (Form 1040). Tax professionals have told us that because the Hawaii and federal income tax laws are similar, people generally put many of the same numbers on both returns. So, they suggested, why not a state tax form that starts with a total taken from the federal return?

We thought the idea was a good one. With the one-page form, many people will do less math and send in less paperwork. That means less work for you and savings to us in processing time, costs of printing, and postage.

Are Schedules A through F required to be filed with Form N-11?

No. Most of the information on Schedules A through F is the same as on the federal schedules. We get the federal information from the IRS on computer tape under an agreement with the IRS to exchange information.

Some of the information on Schedules A and D must be computed separately for Hawaii. Those calculations are done on worksheets in the instruction booklet.

We do require that you attach a copy of the first page (just the front is enough) of your federal return.

Should I still attach the separate forms to claim the food tax credit, medical services excise tax credit, credit for low-income household renters, and credit for child and dependent care expenses?

Schedule X, also introduced this year, replaces all four of these forms. You can file Schedule X with Form N-11, N-12, or N-13 to claim any or all of those credits.

Because of changes in tax laws made by the Legislature in 1995, the food tax credit has been reduced from $55 to $27 per qualified exemption, and the excise tax portion of the food/excise tax credit was repealed. The 4% portion of the medical services excise tax credit is no longer available, but the 6% nursing facility tax portion of the medical services excise tax credit still may be claimed. These changes are reflected in Schedule X.

Do I HAVE to file the new form?

Yes, you must file Form N-11 if you are a Hawaii resident for all of 1995 and you file a federal return for calendar year 1995.

However, you must file Form N-12, rather than N-11, if:

• You are a part-year resident (if filing a joint return, neither spouse is a full-year resident);
• You don't file a federal return;
• You are married filing a joint federal return but are filing separate Hawaii returns;
• You are a fiscal year filer; or
• You were born before July 1, 1911, and are making the special election under Act 30 of the 1976 Hawaii Session Laws.

  Also, if you qualify to file Form N-13, you may use Form N-13. (See question and answer #7.)

If I have to file the new form, why will you be mailing me both Form N-11 and N-12?

We will be sending a packet containing both forms to everyone who filed Form N-12 last year (except for people who checked the box that told us to mail them only a postcard with a pre-addressed mailing label on it).

Most people who receive this package must file Form N-11. If you don't file a federal return, you probably have to file Form N-12. (See question and answer #4.)

When will the new form be available?

You should receive your N-11/N-12 packet, or your postcard with the pre- addressed mailing label, in the mail by mid-January 1996. If you don't receive it by the end of January, please call our Forms Hotline at the number listed at the end of this issue.

Form N-11 also will be available on our Internet web site,
http://www.hawaii.gov/icsd/tax/taxforms.html.

I filed Form N-13 last year. May I still use that form this year?

Yes. You may file the N-13 short form, whether or not you are filing a federal return, if:


• Your income is only wages, salaries, tips, interest, ordinary dividends, and unemployment compensation;
  
• Your taxable income is less than $100,000;
  
• You do not itemize your deductions; and
• You do not claim adjustments to income (such as for contributions to an IRA, alimony paid, or military reserve or National Guard pay).

You might not want to file Form N-13 if you have deductible expenses like home mortgage payments, medical bills, gifts to charity, or political contributions, because you might pay less tax if you itemize your deductions. To itemize your deductions, you need to file Form N-11 (or Form N-12).

I filed Form N-13EZ last year. May I still use that form?

Because the various forms used to claim tax credits have now been consolidated on the new Schedule X, filing Form N-13 is now not that much different from filing Form N-13EZ. Accordingly, we discontinued Form N-13EZ. If you filed on Form N-13EZ last year, you might want to file on Form N-13 this year.

How does the new Form N-11 work?

First, you fill out your federal return. (Remember, you must attach a copy of the first page of your federal return to Form N-11.)

Then, you start Form N-11 by entering your federal adjusted gross income, instead of listing the same income items and adjustments to income that appear on your federal return. We then focus on the differences between federal and Hawaii law to add to, or subtract from, that number.

The additions and subtractions bring you to Hawaii adjusted gross income. From that point forward, the N-11 is almost the same as the old Form N-12.

Examples of these additions and subtractions are listed in the next few questions and answers.

I'm just a wage earner. Do I need to add or subtract anything?

That depends. You need to compare the "federal wages" and "state wages" boxes of your Form W-2. They might be different if:

• You work for the federal government and you are paid Cost of Living Allowance (COLA); or
• You work for the State or a county government, and you are a contributory member of the Employees' Retirement System.

You also may need to make other adjustments that are described in the next few questions and answers.

What if I have pension income or Social Security? I never had to report it before.

If you included Social Security benefits or qualifying pension income as part of your federal adjusted gross income, you may deduct these amounts on the appropriate lines on Form N-11.

Please follow the instructions carefully, however. Not all pension income may be deducted.

What if I had income from tax-exempt municipal bonds or tax- free bond mutual funds?

Interest from municipal bonds or bond funds, although exempt from federal income tax, is not exempt from Hawaii income tax (unless a Hawaii state or county agency issued the bonds). If you received this kind of income, you need to make an adjustment on the appropriate line of Form N-11.

What if I had income from U.S. Savings Bonds or Treasury securities?

Interest from federal securities (for example, U.S. Savings Bonds, Treasury bills, or Treasury notes) is not exempt from federal income tax, but is exempt from Hawaii income tax. If you received this kind of income, you need to make a subtraction on the appropriate line of Form N-11.

However, if you cashed in Series E savings bonds to pay for higher education tuition and fees, you probably filed federal Form 8815 because the federal government does not tax all of the interest. If that happened, you can only subtract the amount reported as taxable on your federal return.

What if I itemized deductions on my 1994 Hawaii return and received a refund of state taxes in 1995?

That depends on what you did on your 1994 federal return.

If you did not itemize deductions on your 1994 federal return (or if you filed Form 1040A or 1040EZ), then the refund is not reported as income on your federal return. Because you itemized deductions on your state return, however, the refund is reportable on your Hawaii return. The instruction booklet contains a worksheet to figure the taxable part of the refund.

If you itemized deductions on your 1994 federal return, you reported your state refund as income on your federal return. Hawaii does not tax that part of your refund that is from Hawaii refundable credits (such as the food tax credit or the general income tax credit). Thus, for many taxpayers Hawaii will tax a smaller part of the state tax refund than the federal government will. You may deduct the difference on the appropriate line of Form N-11. The instruction booklet contains a worksheet to calculate this amount.

In your answer to Question #2, you mentioned that there are worksheets in the instruction booklet. Does the Department want me to file them?

No, you don't need to file your worksheets. Usually we won't need them because we can verify your math by computer.

But please keep the worksheets that you use! If we have a question on something that you put down, we might ask you for the worksheets so you can show us what you did.

After filling out Form N-11 for 1995, I realize that I made a mistake on my return for LAST YEAR (1994 Form N-12). What do I do?

You can correct a mistake by filing an amended return. You can do this by picking up a blank 1994 Form N-12, writing "AMENDED" in the upper left corner, and filling it out correctly. More detailed instructions appear in the instruction booklet. You also can correct a mistake by filing Form N-188X.