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July 3, 2002
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:

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:
Act 223 conforms to other provisions in EGTRRA including the following: 2 Act 223 does not conform to the Job Creation and Worker Assistance Act (JCWAA)

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: 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.

Director of Taxation
HRS Section Explained: HRS Sections 235-2.3, 235-2.4.

1 In tax years 2002 and 2003, single taxpayers with federal adjusted gross income (FAGI) under $65,000 and joint taxpayers with FAGI under $130,000 can deduct up to $3,000 of qualifying expenditures (including tuition and required fees, but excluding room, board and books), even if they don’t itemize deductions. In 2004 and 2005, the deduction increases to $4,000 for those taxpayers, with a maximum deduction of $2,000 for those with incomes between $65,000 and $85,000 ($130,000 and $160,000 for joint filers).
2 The Hawaii estate and transfer tax provisions are in §§ 236D-2 to 236D-4, HRS. The Hawaii tax is equal to the amount allowable as a credit for state death taxes on the federal tax return. EGTRRA phases out the federal credit for state death taxes by 2005. The credit is to be calculated as it has been, then reduced by 25% in 2002, by 50% in 2003 and by 75% in 2004.