Report Title:

Income Tax Relief; Exclusion from Tax for Retirees; Retirement with Dignity Tax Relief Act

Description:

Excludes the first $25,000 of income from income taxation for Hawaii taxpayers age 65 and over.  Phases out the exemption amount for income received over $25,000 and for currently exempt retirement income received on a graduated basis.

THE SENATE	S.B. NO.	3116
TWENTY-FOURTH LEGISLATURE, 2008
STATE OF HAWAII

A BILL FOR AN ACT

RELATING TO INCOME TAXATION EXCLUSION FOR INDIVIDUAL TAXPAYERS AGED 65 AND OVER.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

     SECTION 1.  The purpose of this Act is to provide parity amongst the retired persons of Hawaii in the tax treatment of income received by these individuals, no matter what the source.  Under current law, only participants in a state-financed pension plan or other qualified employer-funded private pension plan are entitled to an income tax exclusion on income received from these plans.  Persons who have saved diligently in employee-funded retirement vehicles do not receive this state income tax exclusion.  In reality, only government employees and those with traditional private pensions receive this state income tax exclusion.

     As the retirement savings effort becomes more and more privatized over time, the likelihood that a substantial number of Hawaii taxpayers will benefit from the private employer pension income tax exclusion is dwindling rapidly.  With fewer employers offering traditional pensions and many only assisting employee retirement hopes by making contributions to tax benefited accounts, it is not inconceivable that in the near future only government employees will benefit from this income tax exclusion. 

     Simultaneously with the privatization of retirement benefits is the ever-increasing cost of living in Hawaii.  It is simply unfair for retired persons to be taxed materially differently simply because of the source of retirement income.  If the disparity in taxation of similarly situated retired persons continues, the struggle to make ends meet for retired persons will only worsen.  The legislature intends to bring parity to the taxation of all Hawaii taxpayers by excluding the first $25,000 of income earned by a single person or married person filing separately from Hawaii income tax; and increasing this amount to $50,000 for persons filing a joint income tax return.  These amounts phase out as a taxpayer's income increases.  This benefit will apply to those aged sixty-five and over and will begin in the tax year that the retired person attains the requisite age. 

     This Act shall be known as the "Retirement with Dignity Tax Relief Act of 2008."

     SECTION 2.  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) Any income received by a taxpayer over age sixty-five or attaining age sixty-five before the close of the taxable year, up to a maximum of:

(A) $25,000 for a taxpayer filing a single return or a married person filing separately;

(B) $42,500 for a taxpayer filing as a head of household or surviving spouse; or

(C) $50,000 for a taxpayer filing a joint return;

provided that the maximum amounts allowed under this paragraph shall be reduced by the amount of any rights, benefits, compensation, or other income received in the taxable year under paragraph (2) or (3); provided further that the maximum amounts allowed under this paragraph shall also be reduced at a rate of fifty cents for every dollar of income earned in excess of the maximum amounts, such that the maximum amounts are reduced to zero dollars when a taxpayer's income is $75,000 for the exemption provided in subparagraph (A); $127,500 for the exemption provided in subparagraph (B); and $150,000 for the exemption provided in subparagraph (C).  For purposes of this paragraph, a husband and wife filing a joint return shall be considered one taxpayer so long as at least one spouse is age sixty-five or has attained age sixty-five before the close of the taxable year;

     [(4)] (5)  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)] (6)  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)] (7)  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 express exemption or exclusion;

     [(7)] (8)  Income 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, equivalent to pay received for forty-eight drills (equivalent of twelve weekends) and fifteen days of annual duty, at an:

         (A)  E-1 pay grade after eight years of service; provided that this subparagraph shall apply to taxable years beginning after December 31, 2004;

         (B)  E-2 pay grade after eight years of service; provided that this subparagraph shall apply to taxable years beginning after December 31, 2005;

         (C)  E-3 pay grade after eight years of service; provided that this subparagraph shall apply to taxable years beginning after December 31, 2006;

         (D)  E-4 pay grade after eight years of service; provided that this subparagraph shall apply to taxable years beginning after December 31, 2007; and

         (E)  E-5 pay grade after eight years of service; provided that this subparagraph shall apply to taxable years beginning after December 31, 2008;

     [(8)] (9)  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 that are documented or registered under the laws of the United States;

     [(9)] (10)  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)] (11)  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)] (12)  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;

    [(12)] (13)  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)] (14)  One hundred per cent of the gain realized by a fee simple owner from the sale of a leased fee interest in units within a condominium project, cooperative project, or planned unit development to the association of apartment owners or the residential cooperative corporation of the leasehold units.

          For purposes of this paragraph:

              "Fee simple owner" shall have the same meaning as provided under section 516-1; provided that it shall include legal and equitable owners;

              "Legal and equitable owner", and "leased fee interest" shall have the same meanings as provided under section 516-1; and

              "Condominium project" and "cooperative project" shall have the same meanings as provided under section 514C-1."

     SECTION 3.  Statutory material to be repealed is bracketed and stricken.  New statutory material is underscored.

     SECTION 4.  This Act shall take effect upon approval and shall apply to taxable years beginning after December 31, 2007; provided that amendments made to section 235-7, Hawaii Revised Statutes, by section 2 of this Act shall not be repealed when section 235-7(a) is reenacted by section 3 of Act 166, Session Laws of Hawaii 2007.

INTRODUCED BY:	_____________________________
	By Request