WMTA - HOME

Incentives for Retirement Savings

10/16/2017

WMTA Shares these commentaries, without taking a position unless otherwise noted, to bring information to our readers
To view the archives of the Tax Foundation of Hawaii's commentary click here.

Weekly Commentary

For the Week of October 15, 2017

Incentives for Retirement Savings
By Tom Yamachika, President

During the past few months, the Tax Review Commission, a group provided for in our state constitution that is supposed to meet once every five years, has been busy at work. The Commission is tasked with recommending changes to our tax laws, and its consultant has recommended limiting the pension exemption that we now have in our state income tax code so that it only exempts $25,000 per year.

Our current pension exemption only allows taxpayers to exclude pensions as the result of an employer contribution. So, it applies if an employer puts something away for its employees, but it doesn’t apply if the employees put something away for themselves under a plan sponsored by the employer. For example, if I contribute $100 to my employer-sponsored 401(k) plan and my employer makes a matching contribution of $50, then when I retire and the plan pays me $180, only the one-third attributable to the employer contribution ($50 / $150 total) would be exempt from our state income tax.

Apparently, this rule was designed to take care of defined benefit plans, which many companies had in the old days and which our state government still has now. In modern times, however, people normally get, and employers normally offer, IRAs, Roth plans, 401(k) plans, and defined contribution pension plans. The distinction between the plans that are now taxable and those that are exempt is sketchy at best. If we as a policy matter want to encourage retirement savings, shouldn’t we be encouraging it whether the employer puts something away for the employee or the employees put something away for themselves?

The federal income tax system also has an incentive for retirement savings in that it allows a deduction for contribution to some retirement accounts such as traditional IRAs, even if the contribution is made after the end of the tax year. (Hawaii mirrors this incentive, but generally taxes distributions from the accounts, like federal law.) President Trump’s proposal for tax reform has not yet put this incentive on the chopping block.

This feature of our income tax system is particularly important because not all employers offer pension plans of any kind, and anyone can establish an IRA. One interesting story from one of our loyal readers illustrates this feature of our income tax system.

In February of one year, with the April 15 deadline fast approaching, father and son were at the kitchen table, with receipts, calculators, and tax forms strewn about the area normally occupied by plates, serving trays, and utensils.

“Argh,” says Son. “It looks like I’m going to owe money to the IRS. A little over $1,500.”

“And,” says Father, “you will need to deal with penalties for not paying enough in estimated tax.”

“Oh, no! I didn’t think of that one!”

“And did you put aside money for your later years?

“No…I’m having a hard enough time with the bills I have today!”

“You know what? I have an idea.”

“What is it, Dad?”

“I am going to give you $4,000. We’re going to open a traditional IRA for you and we will put the money in there. Put $4,000 on the IRA deduction line and see what happens.”

“I don’t owe any more! If you do that, Dad, it would be really great!”

“But there is one condition.”

“Oh? What’s that?”

“You’re going to put the tax refunds you get into the IRA so you can take the same deduction next year. And the same goes for the year following. And so on.”

“I can do that. Deal!”

That was a happy ending for Son, who escaped immediate financial troubles and was able to see a ripple effect from the savings; and for Dad, who encouraged his son to save money responsibly and was able to start teaching him how to invest it.

These times of decreasing employer-provided retirement benefits and the uncertainties of Social Security point up the need for government to retain incentives for people to provide for their own financial security after retirement.

If You're Still Paying Use Tax on Amazon Purchases--Stop

10/10/2017

WMTA Shares these commentaries, without taking a position unless otherwise noted, to bring information to our readers
To view the archives of the Tax Foundation of Hawaii's commentary click here.

Weekly Commentary

For the Week of October 8, 2017

If You're Still Paying Use Tax on Amazon Purchases--Stop
By Tom Yamachika, President

Most of us know that when we purchase a good or service in Hawaii, we must pay tax. It's called the General Excise Tax, or GET, and it seems to show up in the price of everything we buy.

This tax, unlike most sales taxes, is imposed on the merchant selling the goods or services to us, but we see it on the bill anyway. But what happens if we want to buy something that local merchants just don't offer, we go online, and no tax appears on the bill. Do we still pay tax when we make those purchases? Technically, yes. The law provides that if you buy something from a merchant who doesn't have to pay our GET and you import it into Hawaii, then you are supposed to pay the tax.

Although this tax, called the Use Tax, applies to many online purchases, most individual taxpayers don't pay it. The Department of Taxation could go after you for it, but generally won't unless you are a business or it's a big-ticket purchase like a car or boat. (This happens in other states with Use Taxes as well, so we are not alone.)

The good news for businesses making online purchases is that the list of merchants that are paying GET is getting longer. Amazon, for example, accounts for a big chunk of online shopping. It is paying GET on purchases made in April 2017 or later, so those who buy things from Amazon and have been paying Use Tax can stop paying on those purchases.

Businesses who register for and pay GET often do it without much fanfare. Their customers who pay Use Tax on purchases from them sometimes keep on doing it unwittingly. One Hawaii Supreme Court case, called Tax Appeal of Aloha Motors, Inc., 69 Haw. 515, 750 P.2d 81 (1988), involved a business that kept on paying Use Tax needlessly between 1968 and 1981, and overpaid more than $760,000 cumulatively. When Aloha Motors finally figured it out, the court held it could only recover three years of overpayments, because there is a statute of limitations in favor of the State. Other General Motors dealerships at the time were all making the same error because of some complex circumstances. They all went to the Legislature, and ultimately obtained a special waiver allowing the recovery of up to around $2 million in overpaid Use Tax. (Act 297, Session Laws of Hawaii 1990.)

If you are a consumer or business and you are paying Use Tax, you shouldn’t expect to get a special waiver like the General Motors dealerships did. If you pay too much and you don’t figure it out within three years, you are probably out of luck. There are, however, great tools that didn’t exist back in the 1980’s. Anyone today can look up GET licenses online. Just go to the Department of Taxation’s website and follow the link that says, “Search the Tax Licenses.” If a vendor of yours has a GET license, you don't need to pay Use Tax on your purchases from that vendor. You’d be well advised to search through your Use Tax vendor list against the licenses every so often.

What happens if you have paid too much? For example, what if you are a business that has dutifully paid Use Tax on Amazon purchases every year and have been doing so until this day, including on purchases made after March 31? One possibility is wait until the year ends, recalculate your annual liability on the G-49 reconciliation return that you need to file anyway, and use that to claim a refund. If you have paid too much in prior years for which the statute of limitations is still open (generally three years from the due date of the return), then you can file an amended return to claim a refund. And, of course, you can always contact your friendly neighborhood tax practitioner to help you figure out which of your options is best.

Save the Date

Highlights

Categories

Archives