Hawaii nonresident income tax

Each year I prepare a nonresident Hawaii return for a friend who has rental property in Hawaii. Hawaii does not use the generally accepted method used by other states to calculate state tax. Most of the other states calculate the tax on worldwide income and apply a ratio of state sourced income to federal income to arrive at the tax. Hawaii calculates the tax by using your Hawaii sourced AGI and allows you to take deductions and exemptions by applying the AGI ratio to those items before arriving at the taxable state income. Because of this method, Hawaii can give you the option of foregoing any deductions, personal exemptions and credits by using your Hawaii AGI as your Hawaii taxable income. This election also allows you to avoid having to complete Column A, your worldwide source income. However, you are required to attach all forms and schedules of your federal tax return to the N-15 whether you make the election or not.

Just to make sure we are not talking past each other.... Column A of the N-15 wants your worldwide income as if you were a Hawaii resident. This is your federal income adjusted to Hawaii law. It's the same method that CA uses for nonresidents. E.g., neither CA or HI would want you to include taxable social security benefits in your worldwide income as neither state taxes those benefits. The only difference between CA and HI is that CA asks for your federal numbers and then gives you two columns to add and subtract from that to conform to CA law. HI only gives you one column to enter the income and adjustments based on HI law.

If you are a CA resident and CA is taxing your HI income and you also pay tax to HI on that same income, CA will give you a credit for the HI taxes. See CA Schedule S.

Thank you. I don't know why, but taxpayer hates the thought of giving a state a copy of my federal return if it is not to be used to calculate that state's taxes. I tend to agree, again, without a specific reason.

Another question: I am assuming that there would be a NOL from this rental activity, given depreciation, maintenance and repairs, etc. Does Hawaii allow NOL carryforwards (indefinitely?) for future use against positive income for a year, or a capital gain when the property is sold?

You can choose not to attach your federal return and maybe you will not get a letter asking for it. I have no experience in this matter with HI.

See the N-15 instruction on page 7 for Line 19 Other Income. It explains the carry back and carry forward rules for NOLs.

[snip]

Thank you, Alan. One more question: can the NOL due to the Hawaii condo be used on the Calif resident's California Income Tax return?

On 7/10/12 4:59 PM, Pico Rico wrote: [SNIP]

As a resident of CA, you include your out of state rental income/loss on your CA return because it flows from your federal return. You then make adjustments, if required, because CA and federal law differ on depreciation schedules (Schedule CA(540)). Then you complete CA Form FTB

3801 and its worksheets to see how much of any passive loss may be allowed on your CA return. Completing FTB 3801 is not for the faint at heart.

assuming taxpayer has plenty of other passive gains, then you just skip the FTB 3801 because all the losses will be more than offset by the gains, right?

But does Calif want you to exclude the out of state loss because it is out of state, or can it be used?

Can you pass this test?

Exception. You do not have to file form FTB 3801 if you meet both of the following conditions: ? You have a net loss from rental real estate activities that is fully deductible under the special allowance for rental real estate. ? You have no other passive activities.

I haven't prepared a CA state return with out of state passive losses in a good number of years. However, I do monitor changes in CA tax law. I am not aware of anything in CA tax law that says a CA resident has to exclude the loss because it doesn't have its source in CA.

well, taxpayer has net passive income. Are you saying FTB 3801 must be filled out and filed even then? "If line 3 shows income, all of your losses are allowed, including any prior year unallowed losses entered on line 1c or line 2c. Transfer the income and losses to the form or schedule on which you normally report them. "

thank you.

I guess the taxpayer passes the test of not having a net loss form activities (plural). that makes sense!

If you have losses from a passive activity you have to file the 3801 unless you meet the exception I posted. The exception is for an entity that has a net loss from rental real estate that is fully deductible AND has no other type of passive activity (gain or loss).

If you have a net gain from all your passive activities, is there ever a possibility that a loss from ONE passive activity would not be fully deductible?

The answers to all your questions have been posted or can be found in the CA instructions for the 3801 under who must file.

Probably just the 1040. However, you should eFile and the tax program will take care of whatever is necessary behind the scenes.