RE:  Imposition of Penalty for Underpayment of Estimated Taxes

The Department of Taxation reminds taxpayers of the provisions contained in Hawaii's Income Tax Law relating to the payment of estimated taxes and penalties for an underpayment of such taxes. The Department will emphasize enforcing these provisions for tax years beginning January 1, 1993. Individual taxpayers making declarations of and paying estimated taxes should use Form N-1 for this purpose. Corporate taxpayers should use Form N-3, and Estates and Trusts should use Form N-5. All of these forms are available from the Department of Taxation.

Penalties for the underpayment of estimated taxes will be imposed under section 235-97(f), Hawaii Revised Statutes, if the exception discussed later in this Tax Announcement does not apply, or if a taxpayer's tax liability exceeds $100 after the application of (1) available credits, taxes withheld on wages, or real property sales, and (2) the overpayment of taxes applied to the current year from the taxpayer's prior year's income tax return. The penalty for the underpayment of estimated taxes shall be assessed at the rate of 8 percent a year upon the amount of the underpayment for the period of the underpayment.

Amount of Underpayment

For the purposes of the penalty for the underpayment of estimated taxes, the amount of underpayment shall be the excess of:

1. The amount of the installment which would be required to be paid if the estimated tax were equal to 70 percent (50 percent for corporations) of the tax shown on the return for the taxable year, over
2. The amount, if any, of the installment paid on or before the required payment date for the installment.

Taxes withheld from wages are considered payments of estimated tax made in equal installments on the due date for the payment of estimated tax, unless the taxpayer establishes the dates on which all amounts were withheld, in which case, the amounts withheld shall be considered payments of estimated tax on the dates the tax was withheld. Taxes withheld on the sale of Hawaii real property, for which the taxpayer has not requested a refund prior to filing the taxpayer's income tax return, shall be considered a payment of estimated taxes on the date received as indicated on the Department's acknowledgment letter to the seller of Hawaii real property.

Period of Underpayment

The period of underpayment shall run from the date the installment was required to be paid to the earlier of:

1. The 20th day of the 4th month following the close of the taxable year, or
2. The date on which any portion of the underpayment is paid.

A payment of estimated tax on any installment date shall be applied first to the payment required on that date, with any excess applied to any previous underpayment.

Exception

The penalty for underpayment of estimated tax shall not be imposed if the total amount of all payments of estimated tax made on, or before, the required installment payment date equals or exceeds the lesser of:

1. An amount equal to 90 percent (75 percent for corporations) of the tax computed at the rates applicable to the taxable year, on the basis of the actual adjusted gross income and taxable income for the months in the taxable year ending before the month in which the installment is required to be paid, or
2. The amount which would have been required to be paid on or before the required installment date if the estimated tax were the smaller of:
   1. The tax shown on the Hawaii income tax return of the taxpayer for the preceding taxable year, if a return showing a liability for the tax was filed by the taxpayer for the preceding taxable year and that preceding taxable year was a year of 12 months, or
   2. An amount equal to the tax computed at the rates applicable to the current taxable year on the basis of the facts shown on the taxpayer's Hawaii income tax return for, and the law applicable to, the preceding taxable year, if a return for that preceding taxable year was filed, and on the basis of an individual taxpayer's status with respect to personal exemptions for the taxable year, or
   3. An amount equal to 70 percent (50 percent for corporations) of the tax for the taxable year computed by annualizing the adjusted gross income and taxable income for the months in the taxable year ending before the month in which the installment is required to be paid.  The adjusted gross income and taxable income are annualized by:
      1. Multiplying by 12 (or the number of months in the taxable year) the adjusted gross income, or the taxable income (computed without the deduction of personal exemptions), for the months in the taxable year ending before the month in which the installment is required to be paid,
      2. Dividing the result obtained in (1) by the number of months in the taxable year ending before the month in which the installment date falls, and
      3. In the case of the computation of taxable income of individuals, deducting from the product of (2) the deductions for personal exemptions allowable for the taxable year determined as of the required installment payment date.