Hawaii Net Investment Income: Understanding the Tax Implications
Net investment income in Hawaii is subject to state income tax, and taxpayers must report and calculate this income using specific forms and worksheets. The Hawaii Department of Taxation requires individuals to determine their net capital gains and losses, which are part of their net investment income, using designated forms such as Form N-11 and Form N-15.
Key Forms for Reporting Net Investment Income
- Form N-11: Used to calculate Hawaii net long-term capital gain. This form includes adjustments for Hawaii source income and requires combining long-term and short-term capital gains to determine net capital gain.
- Form N-15: Serves as a Capital Gain/Loss Worksheet for non-residents or part-year residents. It helps compute Hawaii net capital gain by adjusting federal capital gains for Hawaii-specific rules.
- Form N-168: Used to compute tax on net capital gains. Taxpayers enter the smaller of their federal net long-term capital gain or Hawaii net capital gain, then apply the appropriate tax rate schedule.
Calculating Hawaii Net Capital Gain
To determine your Hawaii net capital gain, follow these steps:
- Combine your Hawaii long-term adjustments (if any) and enter the total on Form N-11, line 3.
- Combine your Hawaii short-term adjustments (if any) and enter the total on Form N-11, line 6.
- Calculate your net capital gain by combining lines 3, 5, and 6 (Form N-11, line 7).
- Enter the smaller of your federal net long-term capital gain (from Form 1040, Schedule D, line 16) or your Hawaii net capital gain (line 7) on Form N-11, line 8.
- If you filed Form N-158, enter the amount from line 4e of that form on line 9 of Form N-11.
- Subtract line 9 from line 8 (Form N-11, line 10). If the result is zero or less, you cannot use this worksheet to figure your tax.
- Subtract line 10 from line 1 (total Hawaii income) to get your Hawaii ordinary income (line 12).
- Calculate tax on line 12 using the Tax Table or Tax Rate Schedules.
Tax Treatment of Capital Gains in Hawaii
Hawaii taxes capital gains at the same rate as ordinary income. However, taxpayers must use the Tax Rate Schedules or Tax Table to compute the tax on their net capital gains. The state does not offer preferential rates for long-term capital gains.
For non-residents or part-year residents, Form N-15 is used to compute Hawaii source capital gains. The worksheet requires entering federal long-term capital gain and subtracting any Hawaii adjustments to determine the taxable amount.
Important Notes
- Do not include income exempt in Hawaii, such as employer-funded pensions or income from qualified high technology businesses.
- Interest income derived from intangible assets with a situs in Hawaii must be reported on Form N-15, line 5.
- Taxpayers must use the correct worksheet based on residency status and filing requirements.
Source:
Form N-11 Instructions
Form N-15 Instructions
Form N-168 Instructions
Disclaimer: Always verify information with official Federal or State Department of Revenue Forms and Instructions before filing your return.