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

Current through June, 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.