We took a credit for taxes paid to another state - but...

Some of the tax was refunded....


In 2018, the client sold a property in OR and paid $20,000 in taxes (for example - I'll have to look at the actual numbers).

Client is a Hawaii resident and Hawaii taxes your worldwide income, but we claimed a $20,000 tax credit for taxes paid to OR.

Now for 2019, OR provides the "kicker" surplus credit for like $3600 (don't hold me to these exact numbers).

Hawaii N11 instructions say:

Out-of-State Tax Refund. If you claim this
credit and you later receive a tax refund from
the other state or foreign country, you MUST
report this to the Department. You may be subject to penalties if you fail to make this report.

I can't just amend - as there will be late penalties and interest, right? Anyone familiar with how to handle this?

I'm guessing Hawaii will simply want the added tax in the year of the credit. Was 2019 the year of the credit?

The Hawaii law is referenced in the Instruction you quote. I read it. It says "(c) If any taxes paid to another jurisdiction for which a taxpayer has been allowed a credit under this section are at any time credited or refunded to the taxpayer, such fact shall be reported by the taxpayer to the department within twenty days after the credit or refund. Failure to make such report shall be deemed failure to make a return and subject to the penalties imposed by law in such cases. A tax equal to the credit allowed for the taxes so credited or refunded shall be due and payable from the taxpayer upon notice and demand from the department. If the amount of such tax is not paid within ten days from the date of the notice and demand, the taxpayer shall be subject to the usual penalties and interest for delinquency in payment." Seems clear.

Here's the related reg., also clear. "(i) Duty to report reduction in tax of the foreign jurisdiction. If a taxpayer has obtained or at any time
obtains, a credit for, or a refund of, taxes paid to a foreign jurisdiction and for which tax credit under section 235-55, HRS, and this section is or has been claimed, or claimed and allowed, the entire amount of the credit or refund must be reported by the taxpayer. The taxpayer shall report the credit or refund at the time the claim for tax credit is made under section 235-55, HRS, or if the claim for tax credit already has been made, within twenty days after the taxpayer is notified of the credit or refund. Failure to report the credit or refund within the required period is deemed a failure to file a return and is subject to penalties and interest as provided by sections 231-39 and 235-55(b), HRS.
Any credit or refund reporting requirement under this subsection shall be made in the form of an amendment to the taxpayer’s Hawaii income tax return. The taxpayer shall amend the taxpayer’s Hawaii income tax return for the taxable year in which the tax credit is taken."

Thanks for that. So that's not too hard to read, as far as tax code goes.

The tax credit will be a 2019 tax credit on the OR return. The refund is tentative as we have just recently prepared the 2019 OR return - it's not filed or finalized, and no refund has been received.

So I should "add" ~$3600 in tax to the 2019 Hawaii tax return.

How does one go about "adding tax" to a (state) tax return? I can ask the technical department, I suppose.

That seems to be covered by Nilodop's last paragraph in his response . ..... "The taxpayer shall amend the taxpayers Hawaii Income Tax for the taxable year in which the tax credit is taken "

If I just amend, would the system not automatically penalize?

I dont trust Hawaii to catch it. Guess I don't have a choice.

The sequence, and refer to the law and reg. when you amend:

no refund has been received..

such fact shall be reported by the taxpayer to the department within twenty days after the credit or refund.

Any credit or refund reporting requirement under this subsection shall be made in the form of an amendment to the taxpayer’s Hawaii income tax return.

A tax equal to the credit allowed for the taxes so credited or refunded shall be due and payable from the taxpayer upon notice and demand from the department.

It does spell it out (thanks) but I would bet $1 that Hawaii will mistakenly send him a penalty notice.

Oh well, guess I'll jump onto that hamster wheel when it happens.

My entire Hawaii experience was a refueling stop on the way to Tokyo. Stll, I'm a risk taker. Bet's on. Loser pays via ACH. I'll tryst you to let me know what happens. I hope this is not illegal gambling across state lines.

Booked! LOL. (edit: might have to be pay pal)

Though I'm going to stack the odds in your favor with a statement with bold letters explaining the situation, a copy of the tax code, that a penalty is in appropriate, and pleading with them not to put me into that endless loop of abating it.

I hope I lose!