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Hawaii tax returns -taxability of retirement pension when Federal COVID rules apply

peterhawaii
Level 3

Hawaii says:

"You Must Fix This Error   Hawaii Individual

Retirement Exclusion Worksheet line 6, total exclusion.

We're still working on updates related to Retirement Distributions that qualify for disaster or COVID relief.  You can keep working on your tax return and we'll remove this message when its ready."

 

This is very misleading.  A:t tax.hawaii.gov, Tax Law and Guidance, Digest of Tax Matters 2020, they are very clear that the Federal COVID provisions do not apply  (Look at pages 13, 14 and 15).  If I can figure out how to attach this statement I will attach it to this E mail.

I have sent a letter to Senator Morikawa asking to make a law allowing Hawaii to follow the Federal COVID rules.  Also, since Hawaii law is that when ever there is a Code 1 the retirement is 100% taxable I have asked him to change the law so it is not taxable.

The thing for Hawaii tax preparers is to be aware that as I see it, under current Hawaii law 100% of this distribution is taxable.

To get the federal tax return to follow the COVID rules of only 1/3 taxable and no penalty, Scroll down in Form 1099 R worksheet and you will find a place to make this happen.

 
 
 
 
 

 

Subject: RE: Taxation retirement plans. Can Hawaii state legislators make a law that provides 2020 retirement plan to be not taxable to Hawaii or only 1/3 taxable each year over 3 years.

 

 

Presently “ the following provision is not operative for Hawaii income tax purposes.

 

72(t); non-code

 

Waiver of 10% Early distribution penalty

 

A 10% penalty applies to any early distribution from a qualified retirement plan.

 

The Act waives the 10% early distribution penalty for distribution related to the

Coronavirus of up to $100,000.  The Act allows any taxable distributions to be

Taxed ratably over the following 3 years.  Related to coronavirus includes

Those diagnosed, whose spouse or dependent was diagnosed, and those who

Experienced financial hardship from quarantine, furlough, layoff, or other indirect

Effect of corona virus.

 

Effective for distributions made from Jan 1, 2020 through December 31, 2020.”

 

 

Hawaii residents can not take advantage of the 1/3 being taxable.  Also because there

Is a code 1 on the Form 1099 R 100% of the distribution is taxable.

 

Can Hawaii make a law to follow the Federal rules and allow  only 1/3 taxable each

Year for 3 years.

 

 

Better yet, because the code 1 10% penalty is waived for the federal tax return,

can Hawaii law change, proceed as if there is no code 1, and make the distribution 100% not taxable.

Presently with retirement income when there is a code 1, the retirement plan is taxable to Hawaii.

If there were no code 1 the qualified retirement plan would not be taxable to Hawaii.

 

 

To get the above information I went to:

Tax.hawaii.gov

Tax Law and Guidance

Digest of Tax Matters

2020

 

From Peter Goodbody

[email address removed]

Phone 591-0445

 

Sharon Y Morikawa is the Senator from  S District 12

Waikiki, Crestview. Manoa, Pearl City and Pacific Palisades

 

 

 

 

 

 

 

 

 

 

 

 

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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17 Replies 17
mkk
Level 3

I'm also hoping the legislation will overturn this as they're in session right now, but this will definitely not be done for this tax year. 

Were you able to see when proseries will get this fixed?  I've been searching for that information with no resolution.  I'm starting to feel that we need to manually put it in and have the clients mail it in.  Any thoughts?  

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peterhawaii
Level 3

FIX:

Have the Form 1099 R changed to code two.  Then Hawaii retirement will not be taxable.

In the original E mail you will note the Federal provision is under section 2.

In the IRS instructions form code 2 says that  section 72 t gets a code 2.  I believe page 15 of the Form 1099 R instructions.

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peterhawaii
Level 3

When getting a correted form 1099 R to code 2, you should also get  box 2 a changed to 1/3 of the full pension.

The taxable portion  under section 72 t of the law is now being deducted 1/3rd each year for 3 years.

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mkk
Level 3

The problem I've been having is the N-11 retirement wks.  I'm trying to add the full amount of the 1099-R income to be added as Hawaii laws states, but it keeps bringing up that error alert.  Do you know when that will be updated?

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peterhawaii
Level 3

The trick is to get a corrected Form 1099R.  Change the Code 1 to code 2 and also change 2a the taxable amount to 1/3 of the box .  This is per federal 72 t which is the law on some retirement distributions affected by COVID.

Then we just have to wait for ProSeries to get rid of the error message.

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peterhawaii
Level 3

Pro Series phone technicians say March 12.  The important thing is the code must be changed from 1 to 2, because code 2 is always taxable to Hawaii. The code 2 exception is the last one listed in what can be code 2.  The provision the IRS uses is72 t.  This is the law that makes the pension 1/3rd taxable each year for 3 years and waives the 10% penalty.

In correcting the Form 1099R also change the taxable amount to 1/3 of box 1

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mkk
Level 3

I appreciate the update.  March 12 it is.

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mistahtee
Level 1

Im having the same problem they told me to wait for the update on 3/18? 

Basically its Hawaii fault? because they can't make up their mind.

If anyone finished their N-11? Can you explain to me how you did it without getting the "fix" message everytime.

mkk
Level 3

You should be able to file it.  It has been fixed.  

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peterhawaii
Level 3

The IRS went to a lot of trouble to change code 2 Exceptions to the 10% penalty, listing for 2020 instructions for 1099R code 2 is to be used for section72 (t). Section 72 (t) is the new COVID law making only 1/3 taxable for each year and waiving the 10% penalty

If the Form 1099 R had a code 2 then for Hawaii nothing is taxable as retirement is always taxable for code 1.  My customer now has 78864 taxable to Hawaii because the institutions filling out the Form 1099 R are refusing to follow the IRS guidelines for Code 2.

This new fix is making the 1/3 portion of the retirement income not taxable to Hawaii, but then in another section of the Hawaii return it is adding back the whole 78864.

Does anyone know who to talk to at the IRS to get the institutions filling out Form 1099 R to  use code 2 per the 2020 code 2 instructions for Form 1099 R..  The IRS has penalties of up to 1 1/2 million if Form 1099 R is not filled out properly.

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mkk
Level 3

Some of my clients are in the same situation and was advised the same by their institution.  I have no idea who you'll be able to call, but I know it'll be a long hold time.  I went ahead and put it through as is.  I heard that the legislature may be looking into this, but won't be able to pass it until the 2022 if it does pass.  I'm thinking it'll be for code 1.  Hope someone will be able to answer your question.

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mauigal
Level 1

How do you go about changing the 1099 -R to code 2 and 1/3 of box 1?

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peterhawaii
Level 3

ProSeries Professional somehow knows that the retirement withdrawal is subject to section 72(t) and for the Fed automatically only make 1/3rd taxable the first year and even though there is a code 1 knows the withdrawal is not subject to a 10% penalty.  This is what section (t) says to do.

The problem lies with the states which if code 1 is used makes the withdrawal 100% taxable.  If Code 2 was used then none of the withdrawal would be taxable.  Someone in the IRS has deemed that code 2 is for this situation.  If the institutions would use code 2 then none of this is taxable to the states.

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peterhawaii
Level 3

I think the situation is fixed.  The Federal correctly taxes1/3rd and has no penalty.  On Hawaii you have to be sure to add back the full amount as it is all taxable to Hawaii.  I forget if the program makes the subtraction of the 1/3rd retirement income automatically or if it makes the additional adjustment for the full amount of the retirement automatically.  You just make sure those are taken care of when you make your pdf files for additions and for subtractions.

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taxea96786
Level 7

Peter...I did the same research you did and I think that section was listed under:

the following provision is operative for Hawaii income tax purposes.

You might want to look at it again, just to be sure.

Have you heard anything about Hawaii Legislature adopting the Federal exemption of 10,200 for the UI payments?  I don't want to file Hawaii returns until I know for sure that they are not going to adopt the Federal rule on UI taxing.

 

 

 

 

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peterhawaii
Level 3

taxea  I am not sure what provision you want me to look at.

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mkk
Level 3

I wouldn't hold my breath for the State to pass the UI exemption. The last I heard is that the Senate passed it, but the House has not scheduled anything for it.  To my understanding it's said that if the House didn't schedule for it then it may have been killed and Legislation is almost over.  Hopefully it'll come up again next year and keep coming up until it passes.

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