Act 253 modifies the Hawaii income tax law by revising the formula for calculating the income tax for nonresidents and part-year residents to ease the tax reporting requirements for nonresidents and part-year residents. Act 253 is effective for taxable years beginning after December 31, 1998.
Under prior law (Act 281, SLH 1997), nonresident taxpayers with income from Hawaii sources were required to calculate their Hawaii income tax liability by determining tax liability as if they were Hawaii residents. That amount was then apportioned by the ratio of Hawaii sourced adjusted gross income (AGI) to total AGI from all sources (i.e., the percentage of the nonresident's total income that is attributable to Hawaii sources).
Act 281 was enacted in response to a recommendation from the 1995-1997 Tax Review Commission (TRC) to cure a disparity in treatment between the income tax treatment of nonresidents and residents. Prior to Act 281 nonresidents were allowed full deductions for personal exemptions even though the income reported to Hawaii may be for only a small portion of the year or may be only a small portion of the nonresident's total income for the year. In addition, nonresidents who did not itemize deductions were permitted to take standard deduction amounts equal to that of residents. While the TRC's recommendation is laudable, the actual implementation of Act 281 was hard on nonresident taxpayers, particularly military personnel and their families.
1. Act 281 discouraged economic activity by substantially raising the tax liabilities of nonresident investors and requiring all nonresidents earning income in Hawaii to file tax returns no matter how small the amount of income.1 Consequently, all nonresident employees brought to Hawaii by a company doing business in Hawaii for purposes of training and receiving compensation for undergoing such training were required to file income tax returns on their limited activity within Hawaii. Thus, employers doing business in the Hawaii may be discouraged from using Hawaii as a training center.
2. Act 281 significantly increased the tax liabilities of military personnel. In many instances, nonresident Hawaii tax liabilities were 1000% more than the liabilities calculated under the law prior to Act 281.
3. Act 281 created administrative difficulties for taxpayers as the method of calculating taxes is much more complicated under Act 281 than under the law prior to Act 281.
4. Lastly, Act 281 was modeled after California Law and despite representations that such a model would be only slightly more complicated than the law prior to Act 281, it has proven to be an administrative ordeal. In fact, the California Franchise Tax Board has indicated its own reservations regarding this method of taxation, characterizing its application as a continuing source of contention and confusion within their department.
In keeping with the TRC's recommendation to address the inequities between
the tax treatment of nonresidents and residents, but also avoiding the
negative impact and complexities of Act 281, Act 253 provides that the
ratio of Hawaii sourced AGI over total AGI shall be applied to determine
a nonresident taxpayer's allowable exemption and standard deduction. This
way, the nonresident is only allowed to claim a fraction of the personal
exemption and standard deduction amounts which are allowed in full to residents.
The amount is limited to the percentage of the nonresident's Hawaii sourced
AGI as it bears to the nonresident's total AGI:
|Hawaii sourced AGI|
|-------------------------||X||Applicable exemptions/standard deductions||=||Nonresident's allowable
exemptions & deductions.
|Total source AGI|
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.
RAY K. KAMIKAWA
Director of Taxation
1 Prior to Act 281, a nonresident who had taxable income less than the amount of allowable personal exemptions and the standard deduction was not required to file a return since no tax would be due. Under Act 281, however, every nonresident had to file a return if he/she had any income earned in Hawaii. Each nonresident must go through the entire computation to figure his/her tax liability. There was no "easy way out" of filing under Act 281.