Hawaii Administrative Rules
Title 18 - DEPARTMENT OF TAXATION
Chapter 235 - INCOME TAX LAW
Subchapter 3 - INDIVIDUAL INCOME TAX LAW
Section 18-235-55 - Tax credits for resident taxpayers

Universal Citation: HI Admin Rules 18-235-55

Current through August, 2024

(a) For purposes of this section:

"Foreign jurisdiction" means any state, territory, or possession of the United States, or any foreign country, except Hawaii. State, territory, or possession of the United States includes the District of Columbia and Puerto Rico.

"Resident" as used in this section is defined by section 235-1, HRS.

(b) In general. To receive credit under section 235-55, HRS, part or all of a taxpayer's taxable income for the taxable year must have been derived or received from sources outside the State and taxed by a foreign jurisdiction, as illustrated by the following examples:

Example 1: Taxpayer, a resident of Hawaii, is a beneficiary of a trust. The trustee of the trust is a trust company organized and doing business in State X, where the trust corpus is held and administered. Trust income received by the taxpayer includes interest derived from Hawaii State bonds and State X bonds. Under chapter 235, HRS, all income received by a Hawaii resident, regardless of source, is subject to Hawaii income tax. Therefore, all interest received by the taxpayer from the trust shall be subject to Hawaii income tax. In the event State X also imposes a tax on the entire income received by the taxpayer from the trust, including interest from State X bonds, the taxpayer may claim tax credit under section 235-55, HRS, and this section for the portion of the tax which is attributable to the interest income derived from the State X bonds. The tax credit available under section 235-55, HRS, will prevent the interest income from being taxed by both Hawaii and State X.

Example 2: Taxpayer, a resident of Hawaii, earns a salary in Hawaii and owns rental property located in State Y. The rental property is the taxpayer's only source of income from State Y. In 1993, after subtracting allowable deductions related to the rental property from the total gross rental income, the taxpayer sustains a loss from the rental property for State Y tax purposes.

As set forth in section 235-4, HRS, all income received by a Hawaii resident, regardless of source, is subject to Hawaii income tax. If State Y also considers the taxpayer a resident, and imposes State Y income tax on the taxpayer's taxable income, Hawaii income tax credit may be available. In this particular case, however, the taxpayer may not take any Hawaii income tax credit on account of any State Y tax will report a loss for State Y tax purposes. Under section 235-55, HRS, and this section, income tax credit only is available if all or a part of a taxpayer's income is derived or received from sources outside the State and taxed by a foreign jurisdiction. Therefore, for purposes of this section, no Hawaii income tax credit is available.

Example 3: Taxpayer, a resident of Hawaii, owns rental property in State M and carries on a business in Hawaii. Taxpayer receives income from both the rental property and the business during the taxable year; taxpayer has no other income.

Taxpayer's net income from the rental property is $10,000 and the Hawaii business shows a net operating loss of $6,000. As a result, taxpayer's Hawaii net adjusted gross income is $4,000. If State M also imposes a tax on the income from the rental property, the taxpayer may claim Hawaii income tax credit under section 235-55, HRS, and this section. The amount of tax credit available shall be equal to the amount of State M tax paid by the taxpayer on the rental property income.

(c) Taxpayer eligible for the credit. Only an individual resident taxpayer, or an estate or trust liable for taxes imposed upon an individual, may claim tax credit under section 235-55, HRS and this section.

Tax credit under section 235-55, HRS, and this section, however, is not available for taxpayers described in section 3 of Act 60, SLH 1976: namely those taxpayers who have taken up residence in the State (1) after attaining the age of sixty-five years, and (2) before July 1, 1976. For these taxpayers, income from sources outside the State are not includable in their taxable income for Hawaii income tax purposes. Since tax credit only is available for tax paid on income taxed by a foreign jurisdiction and which is includable in taxable income for Hawaii income tax purposes, these taxpayers do not qualify for tax credit under section 235-55, HRS, and this section.

(d) Taxes which qualify for the credit.

(1) Taxes paid to a foreign jurisdiction qualify for Hawaii income tax credit under section 235-55, HRS, and this section, if the taxpayer can show that:
(A) The taxpayer is liable for and has paid tax to the foreign jurisdiction. Nothing contained in section 235-55, HRS, or this section shall be construed to permit a credit against the taxes imposed by chapter 235, HRS, on account of federal income taxes paid.

(B) The tax paid to the foreign jurisdiction is an income-based tax. Tax imposed with respect to a privilege, activity, occupation, trade, business, or calling is not an income-based tax. In addition, no income tax credit may be claimed for any interest or penalties paid in connection with any income tax imposed by the foreign jurisdiction.

(C) The tax paid to the foreign jurisdiction is based upon net income, and that the income is taxed in the same taxable year in which the tax credit is claimed. Taxes imposed on a taxpayer's gross receipts or gross income, which must be paid regardless of whether or not the gross receipts or gross income constitutes net income, do not qualify for tax credit under section 235-55, HRS, and this section. These taxes do not qualify for tax credit, even though in particular instances the income which is taxed is net income in whole or in part.

Taxes imposed upon wages and salaries for services performed within a foreign taxing jurisdiction may qualify for tax credit; the tax must be imposed as a part of a net income tax, even though no deductions are allowed in respect of wages and salaries.

(D) The tax is equally applicable to residents and nonresidents. Tax credit may only be taken if the tax imposed by the foreign jurisdiction applies to the taxpayer's income irrespective of the taxpayer's residence status. For example, Canada imposes a fifteen percent withholding tax on gross dividends paid by a Canadian company to a nonresident taxpayer does not qualify for tax credit. This Canadian tax liability shall not qualify for a tax credit pursuant to section 235-55, HRS, and this section, because the tax is not equally imposed on both residents and nonresidents.

(2) Income taxes imposed by another jurisdiction shall not qualify for tax credit unless it can be established that the source of the income is outside Hawaii. Taxes paid under the following circumstances, even if imposed as part of a net income tax, shall not qualify for tax credit:
(A) Taxes imposed by a foreign jurisdiction upon dividends and interest, merely because the distributing corporation is a domestic corporation or is a foreign corporation resident in the foreign jurisdiction;

(B) The earnings and profits from which the dividends are paid are generated from business carried on in the foreign jurisdiction; or

(C) The debtor paying the interest is a resident of the foreign jurisdiction.

(e) Calculating the net amount of tax paid to a foreign jurisdiction.

(1) The amount of tax credit which a taxpayer may claim under section 235-55, HRS, and this section is the net amount of tax paid to a foreign jurisdiction after all credits, reductions, and refunds allowed or allowable by the laws of the foreign jurisdiction have been deducted.

The amount of credit available under section 235-55, HRS, and this section, shall not exceed the amount of tax for which the taxpayer is liable to the foreign jurisdiction. A taxpayer must take any credit, reduction, or refund available to the taxpayer to offset the tax liability incurred under the foreign jurisdiction's tax laws.

(2) All deductions shall be taken when determining the tax liability under the foreign jurisdiction's tax laws even if the taxpayer chooses not to take the deductions at the time the return is filed, including any credit allowed for Hawaii income tax paid under chapter 235, HRS.

However, if the taxpayer does not pay the Hawaii income tax prior to or at the time the foreign jurisdiction income tax return is filed, the laws of the foreign jurisdiction usually will not allow the taxpayer to claim any tax credit for the Hawaii tax at that time.

(3) Unless otherwise provided under section 235-55, HRS, and this section, tax credit for tax paid to a foreign jurisdiction may not be claimed until after the tax is paid to the foreign jurisdiction. If, after paying the Hawaii income tax, the taxpayer obtains a credit or refund of tax paid to the foreign jurisdiction, the credit or refund must be reported as provided in this section.

(f) Calculating the amount of foreign jurisdiction tax eligible for tax credit. As set forth in this section, only tax on income derived or received from sources outside the State and taxed by another jurisdiction is eligible for tax credit. Tax paid to a foreign jurisdiction on income from a source in the State or income which is excluded from Hawaii income tax is not eligible for tax credit under section 235-55, HRS, and this section. In calculating a taxpayer's foreign jurisdiction tax liability, only deductions related to the income or property subject to the tax of the foreign jurisdiction shall be allowed.

The amount of tax credit which the taxpayer may claim shall be limited to the lesser of: the maximum amount of credit allowed as calculated under this subsection; or the actual amount of tax, which qualifies for the tax credit, paid to the foreign jurisdiction. To determine the maximum amount of credit allowed under section 235-55, HRS, the taxpayer shall:

(1) Calculate the amount of the taxpayer's Hawaii income tax liability, for the taxable year, based on the taxpayer's entire income without regard to source;

(2) Calculate the amount of the taxpayer's Hawaii income tax liability, for the taxable year, based on the taxpayer's entire income less any income which also is taxed by the foreign jurisdiction;

(3) Subtract the amount of tax liability calculated in paragraph (2) from the amount of tax liability calculated in paragraph (1).

The difference is the maximum amount of credit which is allowed under section 235-55, HRS. The maximum amount of credit allowed, however, shall be compared to the actual amount of tax paid to the foreign jurisdiction; the lesser of the two shall be the amount which the taxpayer may claim as tax credit pursuant to 235-55, HRS, and this section.

Example 1: A married resident of Hawaii has taxable income of $14,000 in 1993; $9,000 is from a source in Hawaii and $5,000 is from a source in State Q. Both Hawaii and State Q require the taxpayer to report the $5,000 as income.

The taxpayer files a joint Hawaii income tax return for 1993; the taxpayer's spouse reports no income. After taking the standard deduction, but before any tax credit is taken, taxpayer's Hawaii income tax liability based on taxable income of $14,000 is $792 (calculated using the tax tables prescribed by the director under section 235-53, HRS). Had the Hawaii income tax been computed based only on the $9,000 from sources in Hawaii, the tax would have been $407. For purposes of this rule, State Q income tax for 1993, imposed upon the taxpayer as a nonresident with respect to the income having its source in State Q, is $129. The computation of the credit is as follows:

Hawaii income tax on entire income$792
Hawaii income tax on income from sources in Hawaii$407
Maximum credit allowable ($792 minus $407)$385

Since the actual amount of State Q tax paid ($129) is less than the $385 maximum credit allowable, the actual amount of Hawaii income tax credit which may be taken is $129. Unless there are any further reductions (e.g., reductions for any tax credit granted by State Q for any Hawaii income tax paid), the amount of tax credit available shall remain $129.

Example 2: An individual taxpayer, whose domicile is in Hawaii, temporarily resides in State X. The taxpayer earns a salary of $10,000 for personal services performed in State X. Taxpayer also has rental income of $5,000 from real property located in Hawaii and $2,000 in distributions from a partnership located in and doing business in Hawaii.

Under the provisions of State X law, the taxpayer's salary ($10,000) and partnership income ($2,000) but not the rental income, are subject to income tax. In this case, State X income tax on $12,000 of taxable income is $226. After applying all available State X tax credits, the taxpayer can reduce the State X tax liability to $162.

For purposes of this example, assume the taxpayer elects to take the standard deduction and that the State X tax is paid before the Hawaii income tax liability is paid. The taxpayer's Hawaii income tax liability based on taxable income of $17,000 (using the tax tables prescribed by the director under section 235-53, HRS) is $1023. The tax liability on income only from sources in Hawaii is $69. The amount of Hawaii income tax credit available to the taxpayer, therefore, shall be the lesser of the maximum amount of credit allowable, or the actual amount of tax paid to the foreign jurisdiction:

Hawaii income tax on entire income$1023
Hawaii income tax from sources in Hawaii$ 69
Maximum credit allowable ($1023 - 69 = $954)$ 954

Compare the maximum amount of credit allowable ($954) with the amount of tax actually paid to the foreign jurisdiction ($162). The maximum amount of tax credit the taxpayer may claim is the lesser of the two amounts ($162). The amount of tax credit shall not be reduced any further, because when the taxpayer filed the State X tax return, the taxpayer claimed all available credits.

(g) No credit against penalties or interest. Tax credit under section 235-55, HRS, and this section, may not be applied against penalties or interest due under section 231-39 and section 235-97, HRS, or any other provision.

(h) How to claim the credit.

(1) In general, credit for taxes paid to a foreign jurisdiction under section 235-55, HRS, and this section, may be claimed either subsequent to or at the time the Hawaii income tax return is filed for the taxable year as set forth in section 235-97(b), HRS. Credit also may be claimed for the payment of a deficiency assessment to a foreign jurisdiction. Taxpayers, however, shall not receive credit for any amount attributable to penalties and interest paid to a foreign jurisdiction. Except as provided in this subsection, credit may not be claimed unless, at the time the Hawaii income tax return is filed, the tax has already been paid to the foreign jurisdiction. The credit amount claimed on the Hawaii income tax return, subject to the limitations provided by section 235-55, HRS, and this section, shall be the lesser of the maximum credit allowed or the amount the taxpayer actually paid to the foreign jurisdiction for the same taxable year. The tax credit under section 235-55, HRS, and this section, for any tax paid to a foreign jurisdiction shall not be claimed for any taxable year except that taxable year for which the return is filed with the foreign jurisdiction.

(2) If a taxpayer qualifies for and claims a tax credit under section 235-55, HRS, and this section, a copy of the tax return filed with the foreign jurisdiction must be attached to the taxpayer's Hawaii income tax return. If the taxpayer is claiming a tax credit for the payment of a deficiency assessment, the taxpayer shall attach a copy of the notice assessing or proposing to assess the deficiency.

The taxpayer shall make available, upon request by the director or designee, records substantiating the payment of tax to the foreign jurisdiction. Records substantiating payment of tax to the foreign jurisdiction include a certified copy of the tax return, receipt of payment, or a canceled check.

(3) If either the taxpayer's Hawaii income tax liability for the taxable year is paid before the tax credit is claimed, or the taxpayer wishes to file the Hawaii income tax return before the foreign jurisdiction's return is filed, the taxpayer may claim the tax credit by amending the taxpayer's Hawaii income tax return after the foreign jurisdiction tax actually has been paid. Upon determination that the taxpayer qualifies for the credit, the appropriate amount shall be credited or refunded to the taxpayer as provided under section 235-110, HRS.

(4) Upon approval of the director or designee, a taxpayer also may choose to present a tentative claim for tax credit provided under this section on the Hawaii income tax return before the tax has been paid to the foreign jurisdiction. The Hawaii income tax return shall be accompanied by payment of the amount of Hawaii income tax due on the return, less the tentative credit amount. Once a tax return is filed with the foreign jurisdiction, a copy of the foreign jurisdiction tax return must be submitted to the department with a copy of the Hawaii income tax return on which the tax credit is claimed; the copy of the foreign tax return shall be filed with the Department within thirty days after the tax return is filed with the foreign jurisdiction. If necessary, the taxpayer also shall amend the Hawaii income tax return to reflect any difference in the amount of tentative credit claimed and the amount of tax actually paid to the foreign jurisdiction.

Tax credit available under this section may be disallowed if: a taxpayer fails to submit a copy of the foreign jurisdiction tax return within thirty days of its filing with the foreign jurisdiction; or if the taxpayer fails to file a tax return with the foreign jurisdiction. In both instances, the taxpayer shall amend the Hawaii income tax return to reflect the disallowance of the credit and pay the appropriate Hawaii income tax. Penalties and interest as set forth in section 231-39, HRS, may be applicable.

(i) Duty to report reduction in tax of the foreign jurisdiction. If a taxpayer has obtained or at any time obtains, a credit for, or a refund of, taxes paid to a foreign jurisdiction and for which tax credit under section 235-55, HRS, and this section is or has been claimed, or claimed and allowed, the entire amount of the credit or refund must be reported by the taxpayer. The taxpayer shall report the credit or refund at the time the claim for tax credit is made under section 235-55, HRS, or if the claim for tax credit already has been made, within twenty days after the taxpayer is notified of the credit or refund. Failure to report the credit or refund within the required period is deemed a failure to file a return and is subject to penalties and interest as provided by sections 231-39 and 235-55(b), HRS.

Any credit or refund reporting requirement under this subsection shall be made in the form of an amendment to the taxpayer's Hawaii income tax return. The taxpayer shall amend the taxpayer's Hawaii income tax return for the taxable year in which the tax credit is taken.

(j) Husband and wife. If a husband and wife file separate returns under chapter 235, HRS, and also file separate returns in the foreign jurisdiction, credit for taxes paid to the foreign jurisdiction may be claimed by each spouse only to the extent that the income of the spouse, as reported under chapter 235, HRS, has been taxed by the foreign jurisdiction. If a husband and wife file a joint return under chapter 235, HRS, the entire amount of taxes paid by either or both to the foreign jurisdiction may be claimed as a credit, regardless of whether the husband and wife filed a joint return or separate returns in the foreign jurisdiction. If a husband and wife file separate returns under chapter 235, HRS, but file a joint return in the foreign jurisdiction, each spouse may claim credit for their proportionate share of the tax paid to the foreign jurisdiction on the joint return. The ratio shall be determined by calculating the income of each spouse, taxed under chapter 235, HRS, and also taxed by the foreign jurisdiction, as it bears to the income taxed by the foreign jurisdiction on the joint return.

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