(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.
