Keep This Tax Credit for Yourself

We have looked at the number of business tax credits the state Legislature has adopted in the past several years and noted that one aspect of these targeted business tax credits is that they favor only a specific taxpayer or activity, thereby shifting the tax burden to other taxpayers who don’t qualify for the tax break.
However, there is one tax credit that all taxpayers are able to take advantage of, but for a very limited time. Plus, it is an extremely generous tax credit equal to 50 percent of whatever you invest. And invest it is. The state Legislature, nearly five years ago, adopted a tax credit to encourage taxpayers to put up matching funds for what is known as Individual Development Accounts (IDA’s).
Nationally, Individual Development Accounts were introduced as a federal initiative to move those on welfare to the work force by limiting the amount of lifetime benefits individuals could receive in the form of public assistance.
To make the transformation from the welfare rolls to the payrolls, the federal government realized that they had to provide those who were receiving public assistance the tools and support to make that transition.
That meant giving public assistance recipients job training and supporting those who had small children by offering child care assistance while their parent or parents were being trained or were at work.
However, the real tough nut to crack was how to change the habits of those who had been dependent on hand outs from the welfare office. The challenge was how to get former welfare recipients into a savings habit instead of spending everything they received either in welfare support or in wages from their first job.
That’s where the concept of IDA’s took root. Patterned after the more familiar Individual Retirement Account, the Individual Development Account allows a qualified public assistance recipient to put money aside that will be matched once the financial goal is reached. There are three qualified purposes for which the welfare recipient can use the savings in an IDA. These goals include saving for post secondary education, a first home, or starting up a small business.
Once the account holder has completed a course of financial literacy and has sufficient savings to realize the goal together with the match, the funds are released and paid toward the goal be it education, a first home, or the start up cost of a new business. So where does the taxpayer fit into this effort to gain financial literacy and help encourage welfare to work families?
Well, the state Legislature set aside $1 million to be used in the form of tax credits for taxpayers who contribute funds that will be used to match the contributions made by the qualified IDA account holder. The rate of the credit is 50 percent. That means for every dollar that a taxpayer contributes toward a matching fund, the taxpayer will be able to claim 50 cents in state tax credits and reduce his or her state income tax bill by 50 cents.
So in the case of a taxpayer who makes a $1,000 contribution toward a matching fund, the taxpayer will be able to claim a tax credit of $500 next April when the annual state income tax return is filed. That will take $500 off what the taxpayer will owe the state. If the amount of the credit exceeds the taxpayer’s liability, any excess amount of the credit can be carried forward to the next tax year until it is exhausted.
However, time is running out for taxpayers to take advantage of this tax credit. The contributions that will qualify for this credit must be made by the end of this year, that is December 31, 2004. While no credit is available at the federal level, the contribution made for the purpose of matching an IDA account holder’s contribution would be considered a charitable deduction and can be deducted for federal purposes.
However, at the state level, it will be an either/or situation. Since the credit is a dollar-for-dollar reduction of tax liability, it would be more advantageous to take the credit rather than the charitable deduction for state income tax purposes. If you would like to make a contribution toward a matching fund, your check can be made out to the “Hawaii IDA Fund” and mailed c/o Parents and Children Together, 1485 Linapuni Street, Suite 105, Honolulu, Hawaii 96819.
Then when you file your return next April, you will need to file state income tax form N-320 with your return. This form will be filled out by Parents and Children Together and validated with the Department of Human Services and mailed to you.
While you are collecting your tax credit, you can also feel good about helping someone who has moved from the welfare roll to the payroll.