What to Know about 2021 Tax Season in Hawaii

When tax forms start to arrive in January, are you filled with a sense of dread? Tax season doesn't have to be stressful. In fact, with some basic information about how taxes are calculated, understanding how tax brackets work, and a little familiarity with tax deductions and credits, you may even feel ready to file taxes on your own.

With Hawaii's 12 tax brackets (the most of any state) and several state-specific rules and tax breaks, filing taxes in Hawaii can be complex.

For Hawaii tax filers, here are a few things to know before you file your 2020 tax return.

Lookback rule for Earned Income Tax Credit and Child Tax Credit

For low to moderate income earners, the earned income tax credit (EITC) gives working taxpayers a federal tax credit ranging from $538 to $6,660, depending on the number of dependent children claimed on their return. The child tax credit (CTC) is worth up to $2,000 for each dependent child under age 17. However, higher income phaseouts do apply to the CTC.

If you lost your job or some of your income in 2020, you might benefit from a one-time lookback provision. The lookback rule allows you to “look back" at your 2019 earned income amount to calculate the EITC and the CTC and use the best year for the credit, as long as you earned less in 2020 than you did in 2019. This could be beneficial because both credits are based on earned income, and unemployment benefits aren't considered earned income. Without the lookback option, you might qualify for a smaller credit or no credit at all in 2020, even though your income took a hit.

If you use tax software or work with a tax professional, they should walk you through all the steps to determine whether the lookback rule will benefit you.

Recovery Rebate Credits

Many Hawaii residents received one or two economic impact payments in 2020 or early 2021. The first round of payments provided up to $1,200 per person, plus $500 for each child under age 17. The second payment was up to $600 per person, plus an extra $600 per child. Both payments were phased out for single filers with income over $75,000 and joint filers with income over $150,000.

Payments were based on income reported on your 2018 or 2019 tax returns, but they were technically an advance of a 2020 tax credit: the Recovery Rebate Credit. When you file your 2020 return, you reconcile the amount you received with the amount you're entitled to claim.

If your 2020 income is lower than your income from 2018 or 2019, you may be entitled to a bigger economic impact payment. If your total economic impact payments were less than your credit amount, you don't have to pay the difference.

Free Hawaii Tax Preparation

You don't have to navigate all of the tax forms yourself or pay hefty fees to have someone file your return for you. There are several options for free tax preparation in 2021.

The IRS's Volunteer Income Tax Assistance (VITA) program provides free basic tax return preparation for people who:

• Make $57,000 or less per year
• Have disabilities
• Speak limited English

Tax Counseling for the Elderly (TCE) programs provide free basic tax return preparation, primarily for people 60 years of age and older.

Due to the pandemic, you must make an appointment to get tax help. You can find a nearby location and phone number for making an appointment using the VITA/TCE Locator Tool.

Bank of Hawaii and Goodwill have also teamed up to provide free 2020 tax preparation services for Hawaii residents. You can find a location and learn more about the program at Goodwill Hawaii.

Hawaii Tax Deadline

The federal tax deadline has just been extended to May 17, 2021 to file your 2020 federal tax return. However, for Hawaii residents, the deadline to file your 2020 state tax return is still April 20, 2021.

If you need more time to gather your paperwork, you can request an extension with the IRS, giving you up to six extra months to file. Just keep in mind that while the extension gives you more time to file your tax return with the IRS, it does not provide more time to pay the amount you owe for 2020. If you expect to owe tax, you'll need to estimate what you owe and make a payment by April 15 to avoid penalties.

Hawaii tax extensions are automatic, so you don't have to submit a form or application as long as you pay 100% of what you owe by the tax deadline and file your state income tax return within six months. You can submit your Hawaii tax payment on Form N-200V.

Legal Disclaimer - Please note, this material has been prepared for informational purposes only, and not intended to provide legal, tax, or accounting advice. Consultation with a legal, tax, or accounting advisor is advised.