Hawaii Administrative Rules › Title 18 - DEPARTMENT OF TAXATION › Chapter 235 - INCOME TAX LAW › Subchapter 1 - GENERAL PROVISIONS › Section 18-235-5-03 - Deductions connected with gross income from Hawaii sources

Current through June, 2024
(a) This section applies to all taxpayers,
				pursuant to section
				235-5(c),
				HRS, and section 265 (with respect to expenses and interest connected with
				tax-exempt income), IRC.
(b) In
				computing the taxable income of a taxpayer subject to tax on Hawaii source
				income only:
(1) Deductions connected with
				Hawaii source income shall be allowed.
(2) Deductions connected with out-of-state
				income shall not be allowed.
(3)
				Pursuant to section
				235-7(e),
				HRS, no deduction is allowed for interest paid or accrued on debt incurred or
				continued:
(A) To purchase or carry bonds if
				interest paid by the bond issuer is out-of-state income or is exempt from
				taxation under section
				235-7(a),
				HRS;
(B) To purchase or carry
				property owned outside of the State; or
(C) To carry on a trade or business outside
				of the State.
(4)
				Deductions from Hawaii adjusted gross income that are not connected with
				particular property or income, such as medical expenses, shall be allowed only
				to the extent of the ratio of Hawaii adjusted gross income to adjusted gross
				income from all sources.
(5)
				Adjustments to income that are not connected with particular property or income
				shall be allowed only in the proportion determined under the following formula.
(A) Determine the aggregate amount of the
				adjustments not connected with particular property or income.
(B) Determine Hawaii source income and
				subtract all adjustments to income other than those included in (A).
(C) Add the amount in (A) to adjusted gross
				income from all sources.
(D) The
				ratio of (B) to (C) is the proportion of the adjustments that are
				allowable.
(6)
				Deductions are connected with a particular kind of income if the deductions
				would be allocable to that income under the principles of section 265 (with
				respect to expenses and interest connected with tax-exempt income), IRC, and
				section 1.265-1(c) (with respect to allocation of expenses to a class or
				classes of exempt income), Treasury Regulations.
Example:
T, a single person aged 60, is a
				  nonresident owning rental property in the State from which T derives $3,500 of
				  gross income during the taxable year and incurs $500 of associated expenses,
				  such as general excise and real property taxes. T also has paid $1,500 in
				  interest on a mortgage on T's personal residence in Iowa. T's adjusted gross
				  income from all sources is $12,000. During the taxable year, T's expenses of
				  medical care, qualifying as such under section 213 (with respect to medical,
				  dental, and similar expenses), IRC, are $1,000.
(1) Because the $500 in expenses is
				attributable to the rental property in Hawaii, the entire amount is allowed as
				a deduction. T therefore has $3,500 - $500, or $3,000, in Hawaii adjusted gross
				income.
(2) Because the $1,500 in
				interest is connected with real property outside Hawaii, no part of that amount
				is allowed as a deduction against Hawaii income.
(3) The $1,000 of medical expenses, wherever
				incurred, is not connected with any particular property or income. Thus, it
				shall be prorated by applying the ratio of Hawaii adjusted gross income to
				adjusted gross income from all sources. In this case the result is
				($3,000/$12,000 x $1,000), or $250. If T does not take the standard deduction,
				T may deduct medical expenses in excess of 7.5 percent of T's Hawaii adjusted
				gross income. Because 7.5 percent of $3,000 is $225, T's medical expense
				deduction for Hawaii purposes is limited to $250 - $225, or $25.