LINDA LINGLEKURT KAWAFUCHIGOVERNORDIRECTOR OF TAXATIONJAMES R. AIONA, JR.

MARIE C. LADERTA

LT. GOVERNOR

DEPUTY DIRECTOR

STATE OF HAWAII

DEPARTMENT OF TAXATIONP.O. BOX 259
HONOLULU, HAWAII 96809

PHONE NO: (808) 587-1510
FAX NO: (808) 587-1560

August 3, 2004

DEPARTMENT OF TAXATION ANNOUNCEMENT NO. 2004-02
RE:Act 89, Session Laws of Hawaii 2004, Relating to Conformity of the Hawaii IncomeTax Law to the Internal Revenue Code (Act 89)

On May 26, 2004, the Governor signed S.B. No. 2983, SD 2, HD 1, into law as Act 89.
Act 89 amends Hawaii’s income tax law to conform with the changes to the Internal Revenue
Code (IRC) made by Congress in 2003. The adoption of the amendments to the IRC sections forState income tax purposes assures continued State conformity with federal income tax law andminimizes taxpayers’ burdens in complying with Hawaii’s income tax law.
Section 2 of Act 89 amends HRS § 231-15.8(b) to extend the special filing extension
rules for service personnel in combat zones to personnel deployed in contingency operations.
This provision would provide conformity with the federal filing provisions in the Military
Family Tax Relief Act of 2003.
Section 3 of Act 89 amends HRS § 235-2.3 (a) to conform the Hawaii Income Tax Law
to the operative IRC sections of subtitle A, chapter 1, amended as of December 31, 2003.
Generally, subtitle A, chapter 1, refers to IRC §§ 1 through 1400. For conformity purposes, thefederal effective dates for amendments to operative IRC sections are adopted.
Section 4 of Act 89 amends HRS § 235-2.4(a) to clarify the application of IRC §§ 163,168, and 179. HRS § 235-2.4 is amended to not conform to the definition of net investment
income (IRC § 163), the bonus for first year depreciation (IRC § 168), and the increase in theexpensing deduction (IRC § 179).
In addition to section 2 of the Act, the following provisions from the Military Family Tax
Relief Act of 2003 are also adopted:
Retroactive (to September 11, 2001) increase of the military death benefit from $6,000 to$12,000;
Clarification that dependent care assistance will not be included in a taxpayer's income
under IRC § 134;
An exception to the two-out-of-five year rule for certain uniformed and foreign service
personnel with respect to the $250,000 gain exclusion for home sales;Department of Taxation Announcement 2004-02
August 3, 2004
Page 2

An exclusion for certain amounts received under Department of Defense homeowners
assistance program;
An above-the-line deduction for overnight travel expenses of national guard and reserve
members;
Penalty-free withdrawals from Coverdell education savings accounts and qualified tuition
programs made on account of the attendance of the beneficiary at certain military
academies;
A loosening of the "substantially all" requirement with respect to membership
requirements of veterans' organizations under IRC § 501(c)(19);1
Income tax and estate tax relief and assistance for families of Space Shuttle Columbia
heroes; andA suspension of an organization's tax-exempt status for any period during which theorganization is designated or identified by U.S. federal authorities as a terrorist
organization or supporter of terrorism
Act 89 also conforms to the Medicare Prescription Drug, Improvement, andModernization Act of 2003 to allow the same tax benefits for health savings accounts (HSAs)
under Hawaii law. HSAs provide tax-favored treatment for current medical expenses as well as
the ability to save on a tax-favored basis for future medical expenses. In general, HSAs are taxexempt trusts or custodial accounts created exclusively to pay for the qualified medical expensesof the account holder and his or her spouse and dependents. HSAs are subject to rules similar to
those applicable to individual retirement accounts.
Current forms and other tax information are available at the Department's website at:www.state.hi.us/tax. If you know which tax form or publication you need, please call theDepartment's request line at 808-587-7572, or toll-free from the neighbor islands and continental
U.S. at 1-800-222-7572. This service is available 24 hours a day, 7 days a week.

KURT KAWAFUCHI
Director of Taxation
HRS Sections Explained: HRS sections 231-15.8, 235-2.3, and 235-2.4.

1

The requirement pertains to veterans' organizations' qualification to secure and retain tax-exempt status.