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The Honolulu Advertiser
Posted on: Thursday, July 22, 2004

Late tax filers can still get breaks

By Deborah Adamson
Advertiser Staff Writer

It can pay to live in Hawai'i.

The state gives you special tax breaks just for being a resident. As the Aug. 20 tax deadline approaches for those who filed for an extension in April, taxpayers still have time to make sure they've taken all the deductions and credits to which they're entitled.

The tax breaks range from a $25 credit for buying a child car seat to a 50 percent credit on a charitable donation. Not only is Social Security income tax-exempt, so are most government pensions. Moreover, the state doesn't tax the interest on municipal bonds — even those from three U.S. territories.

"There are a number of tax credits available on Hawai'i tax returns that are not available on federal tax returns," said Cathleen Tokishi, tax information specialist at the state Department of Taxation.

For instance:

• Seniors don't pay state taxes on Social Security income and certain pension distributions.

Company pensions are exempt if an employer finances an entire retirement plan with no worker contributions, said Shawn Hasegawa, a certified public accountant with Matsuno, Fukuya & Co. in Honolulu.

That means defined contribution plans such as 401(k)s still are taxed but traditional pensions usually are not. Also, the tax break applies only upon retirement, death or disability of the employee.

Government pensions generally aren't taxed, whether or not employees contribute. It also doesn't matter when they take the distribution. But income from an optional retirement fund, such as the state Deferred Compensation Plan now called Island Savings Plan, is taxed.

• Municipal bonds issued by the state and Hawai'i cities and counties and some U.S. territories are tax-exempt. When local governments want to raise money for a capital improvement or other program, they sell municipal bonds. The interest earned on Hawai'i muni bonds are free from state and federal taxes. Puerto Rico, U.S. Virgin Islands and Guam muni bonds also are tax-exempt in Hawai'i.

• A donation to an assistance program for low-income families run by the Asset Building Initiative of Hawaii gets a 50 percent tax credit and is tax-deductible federally.

The "Hawaii Individual Development Account Tax Credit" helps local families buy their first homes, start or continue a small business or attend college or trade school.

The organization, working with other nonprofits such as Parents and Children Together, matches a family's savings by 2 to 1 with a maximum of $5,000 per person or $10,000 per household. The family must earn 80 percent of the area's median income. For a family of four in Honolulu, that's $52,150 a year.

Donors to the program get most of their money back — 50 percent is credited against state taxes and the rest deducted from federal taxes. For example, a $10,000 donation gets a $5,000 state credit. If the donor is in the 28 percent federal tax bracket, about another $2,800 is deducted from federal taxes.

One catch: Donors can only take the tax break once, either as a tax credit or as part of itemized deductions. They can't do both.

Families receiving the money also get a break.

Contributions are deducted from their income and any interest earned in their account is exempt from state taxes.

The state tax credit expires at the end of the year. For more information, call 847-3285.

• If you buy a child car seat either for your baby or as a gift, you can take a $25 tax credit per state tax return. Be sure to attach a receipt.

• Hawaii National Guard and military reservists pay is partially tax-exempt. The first $1,750 of annual pay is tax free. From tax years 2005 to 2009, the amount sheltered from taxes will gradually increase.

• Taxpayers with adjusted gross incomes of $20,000 or below might get a maximum low-income tax credit of $35 per qualified person. For married couples filing separately, incomes should be combined to total $20,000 or less.

• Household renters with adjusted gross incomes of less than $30,000 can get a maximum $50 tax credit per qualified exemption. Married couples filing separately should still add together their incomes to see if they qualify.

• Purchases of business equipment, such as cash registers, entitle small businesses to a 4 percent credit on excise taxes.

For more information, call 587-4242 or 1 (800) 222-3229. Taxpayers can e-mail questions to taxpayer.services@hawaii.gov.

Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.