The Department of Taxation submits a bill during each regular session of the Legislature to conform (or not conform) to the changes made by the United States Congress in the previous year. The 1999 conformity bill, H.B. No. 1197, H.D. 2, S.D. 1, was passed by the 1999 Legislature, and the Governor is expected to sign this bill into law. This year's conformity bill:

• Adopts the technical amendments relating to the $250,000 gain exclusion ($500,000 if married filing jointly) on the sale of a principal residence owned or used for less than two years and the separate computation of the gain exclusion for married individuals filing jointly who do not qualify for the $500,000 exclusion. IRC section 121.
• Adopts the accelerated phase-in of the schedule for deduction of health care insurance expenses paid by the self-employed (100% deduction is allowed in 2003). IRC section 162.
• Adopts the technical amendments relating to the Roth individual retirement account (Roth IRA) for qualified distributions, holding periods, erroneous contributions, roll-overs, and the election to report the total 1998 roll-over into a Roth IRA in 1998 instead of equally over a 4 year period. IRC section 408A. For purposes of determining the aggregate allowable contribution to a Roth IRA or qualified rollover contribution to a Roth IRA from an individual retirement plan other than a Roth IRA, "adjusted gross income" as used in IRC section 408A means federal adjusted gross income. HRS section 235-2.4(g).
• Adopts the technical amendments relating to the education individual retirement account (IRA) for distributions, holding periods, account requirements, and roll-overs. IRC section 530. For purposes of determining the maximum annual contribution amount allowable for an education IRA, "modified adjusted gross income" means federal modified adjusted gross income. HRS section 235-2.4(n).
• Adopts relief from joint and several liability on a joint return by:
  1. relaxing the requirements for obtaining "innocent spouse" relief (but requiring the taxpayer to make the election in writing in order to obtain relief);
  2. allowing an individual who has filed a joint return, but who is no longer married to, legally separated from, or no longer lives with the spouse with whom the return was filed, to elect separate liability for any deficiency with respect to the joint return; and
  3. authorizing the department to grant equitable relief from liability for unpaid taxes or deficiency in cases where the options in (1) and (2) do not apply. IRC section 6015. HRS section 235-93.5, relating to innocent spouse relieved of liability in certain cases, is repealed because of the adoption of IRC section 6015.
• Adopts IRC section 6511, which suspends the statute of limitation period when a taxpayer is unable to manage financial affairs due to disability, with due regard to HRS section 235-111, relating to the limitation period for assessment, levy, collection, or credit.

The conformity bill amends HRS section 235-2.4 by repealing the reference to IRC section 644, with respect to the special rule for gain on property transferred to a trust at less than fair market value. This section was repealed by the Taxpayer Relief Act (TRA) of 1997, effective for transactions after August 5, 1997, and IRC section 645, relating to the taxable year of trusts, was renumbered as IRC section 644, which is operative for Hawaii income tax purposes.¹

This bill does not conform to the 1998 federal amendment repealing the "more than 18 months" holding period requirement for long-term capital gain treatment. Hawaii did not adopt the "more than 18 months" holding period requirement from the Taxpayer Relief Act of 1997, so no repeal was necessary. (IRC section 1(h)(5)).

The amendments in the conformity bill are effective for taxable years beginning after December 31, 1998, or to the federal effective date, as applicable.

Several income tax provisions that were not in the conformity bill were adopted in other bills by the 1999 Legislature (again subject to veto):

• The deduction for long-term care costs and insurance contract premiums under IRC section 213 is effective for taxable years beginning after December 31, 1998. (H.B. No. 170, H.D. 2, S.D. 1, C.D. 1).
• A State tuition program conforming to IRC section 529 is effective for taxable years beginning after December 31, 1999. (H.B. No. 307, H.D. 2, S.D.1, C.D.1).
• HRS section 235-4.3, relating to the method of taxing nonresidents is repealed because of the complicated method of computing tax liability. This bill will allow a nonresident the standard deduction and personal exemption amounts based upon a ratio of the nonresident's Hawaii sourced adjusted gross income (AGI) to the nonresident's total AGI and the nonresident will be taxed only on income from Hawaii sources. This bill is effective for taxable years beginning after December 31, 1998. (S.B. No. 1180, S.D. 1, H.D. 1).

For a complete listing of the conforming and non-conforming items, please refer to our digests of the 1998 federal tax laws which may be obtained from our website, calling Jo-Ann Shintani of the Rules Office at 808-587-1530, faxing your request to 808-587-1560, or e-mailing your request to: dotax1@aloha.net. The digests transmitted by e-mail will be available in WordPerfect 6.1, Word 97 or PDF format.

Forms and other tax information may be downloaded from the Department's website at http://www.state.hi.us/tax/tax.html. 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 to receive forms by mail or 808-678-0522 from a fax machine to receive forms by fax.

/s/
RAY K. KAMIKAWA
Director of Taxation

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