Here are some thoughts to keep in mind when filling out your Hawaii return. Do not assume that specialized computer tax preparation software services (you know which ones they are) are going to pick up every nuance of Hawaii tax law, especially after a major federal change. They are usually pretty good at coming to the right answer eventually, but in the first one or two years you should be especially careful, because the reality is that Hawaii-specific changes are not that high on their priority list as compared to those in other, more populous states.
First, watch out for the state and local tax deduction. Normally, state income tax and property tax are deductible. The new federal tax law says that no more than $10,000 in state and local taxes are deductible. It doesn’t take much to get to that number in Hawaii, so many of us will find that our state tax deduction is capped at the $10,000. The cap does not apply for state tax purposes, so if your tax software cuts you off at the same amount on your state return, you need to find a way of getting your deduction for the extra dollars for state purposes.
Next, if you have a mortgage and/or home equity loan, the federal rules changed so that the deductible mortgage interest may be limited, and the HELOC interest may be disallowed entirely. These new caps do not apply for Hawaii tax purposes, so, just as with the state and local tax deduction it may be worth your while to make sure that your mortgage interest deduction is being handled correctly.
Are you an employer who saw lots of changes in the amount you can deduct from business income? For example, the new federal law doesn’t allow a deduction for parking benefits, it halves the amount you can deduct for food and drinks purchased for the office, and it completely disallows any deduction for business entertainment in 2018. Hawaii did pick up all those changes, so there will be no new break on the Hawaii return for those items. (Corrected, see below.)
There’s some good news and bad news if you own a small business, are a partner in a partnership, are a shareholder in a S corporation, or get dividends from a real estate investment trust. The good news is that you get a new federal deduction, which tax practitioners call the “Section 199A deduction,” that is intended to give a tax break to individuals who conduct business that gets taxed on their individual tax forms. The bad news is that Hawaii didn’t adopt it, so don’t expect to get a benefit of that deduction on your Hawaii income tax return.
Also, if you have claimed lots of itemized deductions, the federal return will allow you to add them up, within the limits previously described. On the Hawaii return, if adjusted gross income is above a certain amount then a pre-TrumpTax law called the “Pease limitation” kicks in and eats away at your itemized deductions. As a result, the total itemized deductions that you are allowed to deduct in calculating taxable income may be somewhat less than the sum of the various categories of your itemized deductions.
And even if you do use a professional preparer, make sure to go over your draft return carefully before you sign your name to the final version. Make sure that these law changes are included. And good luck with your tax season!
In the Foundation’s latest weekly commentary, “Beware of Tax Software?”, we screwed up! When we were talking about the Trump Tax business law changes, we should have said this:
Are you an employer who saw lots of changes in the amount you can deduct from business income? For example, the new federal law doesn’t allow a deduction for parking benefits, it halves the amount you can deduct for food and drinks purchased for the office, and it completely disallows any deduction for business entertainment in 2018. Hawaii picked up many business tax changes, but it didn’t pick up these. So, there will still be a break on the Hawaii return for those items.
Our thanks go to several expert readers who swiftly called me out on this!
The Foundation regrets the inconvenience.