Report Title:
Income Tax; Foreign Income
Description:
Conforms state income tax to federal Internal Revenue Code exclusion of foreign earned income with limit of $80,000. Authorizes same exclusion for income earned out-of-state in foreign countries or other states or territories.
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THE SENATE |
S.B. NO. |
2004 |
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TWENTY-FIRST LEGISLATURE, 2002 |
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STATE OF HAWAII |
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A BILL FOR AN ACT
RELATING TO INCOME TAX.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:
SECTION 1. The legislature finds that the foreign earned income exclusion found in section 911 of the Internal Revenue Code was established to provide tax relief to United States citizens or residents living abroad for income allowances earned outside the United States. Section 911 provides that up to $80,000 of income earned by United States citizens and residents living abroad may be excluded from federal income taxation.
Although the state income tax generally conforms to corresponding federal provisions, the foreign earned income exclusion provision has not been adopted in Hawaii, and as a result, any income a Hawaii resident earns outside the United States is fully taxable.
The legislature further finds that extending the exclusion to income earned in other states or territories would:
(1) Improve the attractiveness for domestic United States businesses to relocate to Hawaii by reducing the cost of sending employees abroad; and
(2) Encourage Hawaii residents to expand their business opportunities out of State.
The purpose of this Act is to conform state income tax law with the foreign earned
income exclusion found in section 911 of the Internal Revenue Code and to exclude income earned by a resident in foreign countries or other states or territories.SECTION 2. Section 235-2.3, Hawaii Revised Statutes, is amended by amending subsection (b) to read as follows:
"(b) The following Internal Revenue Code subchapters, parts of subchapters, sections, subsections, and parts of subsections shall not be operative for the purposes of this chapter, unless otherwise provided:
(1) Subchapter A (sections 1 to 59A) (with respect to determination of tax liability), except section 1(h)(3) (relating to net capital gain reduced by the amount taken into account as investment income), except section 41 (with respect to the credit for increasing research activities), except section 42 (with respect to low-income housing credit), and except sections 47 and 48, as amended, as of December 31, 1984 (with respect to certain depreciable tangible personal property). For treatment, see sections 235-110.91, 235-110.7, and 235-110.8;
(2) Section 78 (with respect to dividends received from certain foreign corporations by domestic corporations choosing foreign tax credit);
(3) Section 86 (with respect to social security and tier 1 railroad retirement benefits);
(4) Section 103 (with respect to interest on state and local bonds). For treatment, see section 235-7(b);
(5) Section 120 (with respect to amounts received under qualified group legal services plans). For treatment, see section 235-7(a)(9) to (11);
(6) Section 122 (with respect to certain reduced uniformed services retirement pay). For treatment, see section 235-7(a)(3);
(7) Section 135 (with respect to income from United States savings bonds used to pay higher education tuition and fees). For treatment, see section 235-7(a)(1);
(8) Subchapter B (sections 141 to 150) (with respect to tax exemption requirements for state and local bonds);
(9) Section 151 (with respect to allowance of deductions for personal exemptions). For treatment, see section 235-54;
(10) Section 196 (with respect to deduction for certain unused investment credits);
(11) Sections 241 to 247 (with respect to special deductions for corporations). For treatment, see section 235-7(c);
(12) Section 280C (with respect to certain expenses for which credits are allowable). For treatment see, section 235-110.91;
(13) Section 291 (with respect to special rules relating to corporate preference items);
(14) Section 367 (with respect to foreign corporations);
(15) Section 501(c)(12), (15), (16) (with respect to exempt organizations);
(16) Section 515 (with respect to taxes of foreign countries and possessions of the United States);
(17) Subchapter G (sections 531 to 565) (with respect to corporations used to avoid income tax on shareholders);
(18) Subchapter H (sections 581 to 597) (with respect to banking institutions), except section 584 (with respect to common trust funds). For treatment, see chapter 241;
(19) Section 642(a) and (b) (with respect to special rules for credits and deductions applicable to trusts). For treatment, see sections 235-54(b) and 235-55;
(20) Section 668 (with respect to interest charge on accumulation distributions from foreign trusts);
(21) Subchapter L (sections 801 to 848) (with respect to insurance companies). For treatment, see sections 431:7-202 and 431:7-204;
(22) Section 853 (with respect to foreign tax credit allowed to shareholders). For treatment, see section 235-55;
(23) Subchapter N (sections 861 to 999) (with respect to tax based on income from sources within or without the United States), except section 911 (with respect to citizens or residents of the United States living abroad), and except sections 985 to 989 (with respect to foreign currency transactions). For treatment, see sections 235-4, 235-5, and 235-7[(b)], and 235-55;
(24) Section 1042(g) (with respect to sales of stock in agricultural refiners and processors to eligible farm cooperatives);
(25) Section 1055 (with respect to redeemable ground rents);
(26) Section 1057 (with respect to election to treat transfer to foreign trust, etc., as taxable exchange);
(27) Sections 1291 to 1298 (with respect to treatment of passive foreign investment companies);
(28) Subchapter Q (sections 1311 to 1351) (with respect to readjustment of tax between years and special limitations); and
(29) Subchapter U (sections 1391 to 1397F) (with respect to designation and treatment of empowerment zones, enterprise communities, and rural development investment areas). For treatment, see chapter 209E."
SECTION 3. Section 235-7, Hawaii Revised Statutes, is amended by amending subsection (a) to read as follows:
"(a) There shall be excluded from gross income, adjusted gross income, and taxable income:
(1) Income not subject to taxation by the State under the Constitution and laws of the United States;
(2) Rights, benefits, and other income exempted from taxation by section 88-91, having to do with the state retirement system, and the rights, benefits, and other income, comparable to the rights, benefits, and other income exempted by section 88-91, under any other public retirement system;
(3) Any compensation received in the form of a pension for past services;
(4) Compensation paid to a patient affected with Hansen's disease employed by the State or the United States in any hospital, settlement, or place for the treatment of Hansen's disease;
(5) Except as otherwise expressly provided, payments made by the United States or this State, under an act of Congress or a law of this State, which by express provision or administrative regulation or interpretation are exempt from both the normal and surtaxes of the United States, even though not so exempted by the Internal Revenue Code itself;
(6) Any income expressly exempted or excluded from the measure of the tax imposed by this chapter by any other law of the State, it being the intent of this chapter not to repeal or supersede any such express exemption or exclusion;
(7) The first $1,750 received by each member of the reserve components of the Army, Navy, Air Force, Marine Corps, or Coast Guard of the United States of America, and the Hawaii national guard as compensation for performance of duty;
(8) Income derived from the operation of ships or aircraft if the income is exempt under the Internal Revenue Code pursuant to the provisions of an income tax treaty or agreement entered into by and between the United States and a foreign country, provided that the tax laws of the local governments of that country reciprocally exempt from the application of all of their net income taxes, the income derived from the operation of ships or aircraft which are documented or registered under the laws of the United States;
(9) The value of legal services provided by a prepaid legal service plan to a taxpayer, the taxpayer's spouse, and the taxpayer's dependents;
(10) Amounts paid, directly or indirectly, by a prepaid legal service plan to a taxpayer as payment or reimbursement for the provision of legal services to the taxpayer, the taxpayer's spouse, and the taxpayer's dependents;
(11) Contributions by an employer to a prepaid legal service plan for compensation (through insurance or otherwise) to the employer's employees for the costs of legal services incurred by the employer's employees, their spouses, and their dependents; [and]
(12) Amounts received in the form of a monthly surcharge by a utility acting on behalf of an affected utility under section 269-16.3 shall not be gross income, adjusted gross income, or taxable income for the acting utility under this chapter. Any amounts retained by the acting utility for collection or other costs shall not be included in this exemption[.]; and
(13) Income earned and received by a resident from out-of-state sources in foreign countries or other states or territories up to the limit allowed under section 911 of the Internal Revenue Code for exclusion of foreign earned income."
SECTION 4. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.
SECTION 5. This Act, upon its approval, shall apply to taxable years beginning after December 31, 2001.
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INTRODUCED BY: |
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