Hawaii Tax Form N-11 - Individual Income Tax Return for Residents Filing a Federal Return Instructions

Instructions for Form N-11

General Instructions

Guidelines for Filling in Scannable Forms

Form N-11 and Schedule CR are designed for electronic scanning that permits faster processing with fewer errors. In order to avoid unnecessary delays caused by manual processing, taxpayers should follow the guidelines listed below:

• Print amounts only on those lines that are applicable.
• Use only a black ink pen. Do not use red ink or pencil nor felt tip pens.
• Because this form is read by a machine, please print your numbers inside the boxes like this:

  1

  2

  3

  4

  5

  6

  7

  8

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  0

  X

• Do NOT print outside the boxes.
• Fill in ovals completely.
• Do NOT enter cents. All numbers that are required to be rounded to the nearest dollar should NOT be printed over the zeros printed in the handprint boxes used to designate cents.
• Do NOT use dollar signs, slashes, dashes or parenthesis in the boxes.
• Photocopying this form will cause delays in processing your return.

Who Must File

 

1. Every individual doing business in Hawaii during the taxable year must file a return, whether or not the individual derives any taxable income from that business.

   “Doing business” includes all activities engaged in or caused to be engaged in with the object of gain or economic benefit, direct or indirect, except personal services performed as an employee under the direction and control of an employer

   For example, every person receiving rents from property owned in Hawaii is “doing business” and must file a return whether or not the person’s expenses exceed the gross rental income.

2. Every individual receiving more than the following amounts of gross income subject to taxation under Hawaii Income Tax Law, including amounts received as salaries and wages for services rendered by an employee to an employer, must file a return:

   For Individuals Under Age 65 Filing Status Gross Income of Married filing separately $3,040 Single or legally separated $3,040 Single, head of household $3,960 Qualifying widow(er) with a dependent child $5,040 Married couple filing jointly $6,080

    

   For Individuals Age 65 or older Filing Status Gross Income of Married filing separately $4,080 Single or legally separated $4,080 Single, head of household $5,000 Qualifying widow(er) with a dependent child $6,080 Married couple filing jointly,oneis 65 or older $7,120 Married couple filing jointly, both are 65 or older $8,160

   These threshold amounts will be higher for persons who are blind, deaf, or totally disabled, and who have completed and filed a certification with the Department of their disability on Form N-172 before filing their income tax return

   For individuals who can be claimed as dependents on the tax return of another taxpayer, the threshold amount is the amount of the dependents’ standard deduction.

   For nonresident aliens, the threshold amount is $1,040 for individuals under 65, and $2,080 for individuals 65 or older.

   For nonresident individuals, the threshold amounts stated above must be multiplied by the ratio of Hawaii adjusted gross income to total adjusted gross income from all sources to determine whether the individualmust file a return.

3. Individuals who took up residence inHawaii after attaining the age of 65 years and before July 1, 1976, may elect to be taxed only on Hawaii source income. See Election Under Act 60, SLH 1976 on page 5.
4. Children who receive unearned income during the taxable year and have not attained the age of 14 years before the end of the taxable year must file their own returns to report their income unless their parent or parents report that income.

   However, the Department of Taxation will, administratively, not require the filing of a State income tax return if the child’s total earned and/or unearned income for the taxable year is $500 or less and the application of the standard deduction amount results in no taxable income for the child. Children who must file a return may need to file Form N-615, Computation of Tax for Children Under Age 14 Who Have Investment Income of More than $1,000. Parents may report income of their children by filing Form N-814, Parent’s Election to Report Child’s Interest and Dividends.

5. If you need to report additional tax from Form N-2, Distribution from an Individual Housing Account; Form N-103, Sale of Your Home; Form N-152, Tax on Lump-Sum Distributions; Form N-312, Recapture of Capital Goods Excise Tax Credit; Form N-318, Recapture of High Technology Business Investment Tax Credit; Form N-338, Recapture of Tax Credit for Flood Victims; Form N-405, Tax on Accumulation Distribution of Trusts; Form N-586, Recapture of Low-Income Housing Tax Credit; or Form N-814, Parent's Election to Report Child's Interest and Dividends, then youmust file a return regardless of income level.

Who Should File

Even if you do not have to file, you should file to get a refund if toomuch income tax was withheld from your pay. Also, if you are eligible for refundable credits, you need to file a return to claim the credits.

Residents and Nonresidents

Resident

A resident is taxed on income from all sources

A resident must file an Individual Income Tax Return—Resident (Form N-11 or N-13), if required to do so.

A Hawaii resident is (1) Every individual domiciled in Hawaii, and (2) Every other individual whether domiciled in Hawaii or not, who resides inHawaii for other than a temporary or transitory purpose.

An individual domiciled outside Hawaii is presumed to be a resident if he or she spends more than 200 days in Hawaii during the taxable year. This presumption may be overcome by evidence satisfactory to the Department of Taxation that the individual maintained a permanent place of abode outside the State and was in the State for a temporary or transitory purpose. No person shall be deemed to have gained or lost a residence simply because of his or her presence or absence in compliance with military or naval orders of the United States, while engaged in aviation or navigation, or while a student at any institution of learning. See Tax Information ReleaseNo. 97-1, “Determination of Residence Status”.

Nonresident

A Hawaii nonresident is an individual who is in Hawaii for a temporary or transient purpose, and whose permanent domicile is not Hawaii.

A nonresident must file an Individual Income Tax Return—Nonresident and Part-Year Resident (Form N-15), if required to do so. A nonresident will be taxed on income from Hawaii sources only.

A nonresident married to a Hawaii resident may choose to file a joint return with the resi- Page 4 dent spouse on Form N-11 or N-13; however, the nonresident will then be taxed on all income from all sources. For more information, see Married Filing Joint Return on page 7.

Election Under Act 60, SLH 1976

Individuals who took up residence in Hawaii after attaining the age of 65 years and before July 1, 1976, may elect to be taxed only on Hawaii source income. To make the election, attach a signed statement to Form N-11 setting forth the date that the individual established residence in Hawaii and the individual’s date of birth (which must be before July 1, 1911). Individuals making this election must file a return regardless of the amount of income earned, and may not use Form N-13.

Part-Year Resident

A part-year resident is an individual who was a Hawaii resident for part of the year, and who was a nonresident during the other part of the year. This includes those who moved to Hawaii during the year and those who moved away from Hawaii during the year.

A part-year resident must file an Individual Income Tax Return—Nonresident and Part-Year Resident (Form N-15), if required to do so. A part-year resident will be taxed on all income from all sources during the period of residency, and on income from Hawaii sources only during the period of nonresidency.

Domicile Defined

The term “domicile” means the place where an individual has a true, fixed, permanent home and principal establishment, and to which place the individual has, whenever absent, the intention of returning. It is the place in which an individual has voluntarily fixed the habitation of himself or herself and family, not for a mere special or temporary purpose, but with the present intention of making a permanent home. Three things are necessary to create a new domicile: first, abandonment of the old domicile; second, the intent to establish a new domicile; and third, actual physical presence in the new domicile. Once a domicile is established, the intent to abandon it is not itself sufficient to create a new domicile; a new domicile must be shown.

Reminder: If you are in Hawaii because of military orders and do not intend tomakeHawaii your permanent home, you are not considered a Hawaii resident for income tax purposes, even though you have been in Hawaii formore than 200 days in 2007. File a resident return with your home state, and file aHawaii nonresident and part-year resident return (Form N-15) to report your Hawaii income.

Resident and Nonresident Examples

Note: For more information, see Tax Information Release No. 90-3, “Income Taxation and Eligibility for Credits of an Individual Taxpayer Whose Status Changes from Resident to Nonresident or from Nonresident to Resident”, Tax Information Release No. 90-10, “Clarification of Taxation and the Eligibility for Personal Exemptions and Credits of Residents and Nonresidents in the Military and Spouses and Dependents of Persons in the Military”, and Tax Information Release No. 97-1, “Determination of Residence Status”.

Example 1—A Hawaii resident who enlists in themilitary normally will remain aHawaii resident regardless of the length of absence from Hawaii while stationed outside of Hawaii.

Example 2—A Hawaii resident working in a foreign country will remain a Hawaii resident unless permanent resident status is granted by the foreign country.

Example 3—Foreign students who are granted entry into the United States on “F” visas are nonresidents for Hawaii tax purposes. Researchers and faculty members who are granted entry into the United States on “H”, “J”, or “Q” visas, and who have been in Hawaii for more than 200 days during the taxable year may be considered Hawaii residents.

Example 4—Spouses of those in the military service do not become Hawaii residents if their principal reason formoving toHawaii was the transfer of the service member spouse to Hawaii, and if it is their intention to leave Hawaii when the service member spouse either is transferred to another military station or leaves the service.

Example 5—A Hawaii resident who marries a nonresident will remain a Hawaii resident unless the three requirements for changing his or her domicile are also met. (Refer to “Domicile Defined” on this page.) This situation applies in reverse to a nonresident who marries a resident. A person’s residence status will not change just because of marriage.

Which Form to File

You must file resident Form N-11 or N-13, as appropriate, if you were a resident for the full year. File Form N-15 if you were a nonresident for the full year or a part-year resident.

Generally, you MUST use Form N-11 if:

• You were a resident for the full year, or, if married filing jointly, either spouse was a resident for the full year (however, the nonresident spouse would be taxed on their worldwide income for the full year).
• But if you qualify to file Form N-13, you may file it instead of Form N-11.

You MUST use Form N-15 if:

• You were a nonresident for the full year, or, if married filing jointly, both spouses were nonresidents for the full year.
• You are taking up residence in Hawaii during the tax year. (Part-year resident).
• You are giving up residence in Hawaii during the tax year. (Part-year resident).

You MAY Be Able to Use Form N-13 if:

• You were a resident for the full year, or, if married filing jointly, either spouse was a resident for the full year (however, the nonresident spouse would be taxed on their worldwide income for the full year);
• You had only wages, salaries, tips, interest, ordinary dividends, and unemployment compensation, AND
• Your taxable income (adjusted gross income less standard deduction and personal exemptions) is less than $100,000.

 Form N-13 is a simplified form. However, Form N-11 may allow you to pay less tax.

If you are eligible to file Form N-13 but you filed a federal resident return, you may want to file Form N-11 instead because it uses information you already entered on your federal return.

To see if you qualify to use Form N-13, see the instructions for Form N-13.

When to File

Note: If any due date falls on a Saturday, Sunday, or legal holiday, substitute the next regular work day as the due date.

You should file as soon as you can after January 1, but not later thanApril 20, 2008. If you file late, you may have to pay penalties and interest if you owe taxes on your return. Please see the instructions for Penalties and Interest on page 29. If you cannot meet the deadline, you are not required to file Form N-101A, Application for Automatic Extension of Time to File Hawaii Individual Income Tax Return, (or any other form) to request an automatic 4-month extension of time to file Form N-11. The 4-month extension is automatically granted without a filing of any kind. However, youwill not be granted an automatic extension if you are under a court order to file your return by the regular due date.

Form N-101A need only be filed if you are making a payment, in which case Form N-101A must accompany your payment. The extension of time to file is not an extension of time for payment of tax.

Form N-101A can be filed electronically through the State’s Internet portal. For more information, go to www.ehawaiigov.org/efile. Federal Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, may not be used in lieu of Form N-101A.

Note: Returns for fiscal year taxpayers must be filed on or before the 20th day of the fourth month following the close of the fiscal year.

Note: Under Hawaii Income Tax Law, certain tax credits must be claimed within 12 months from the close of the tax year.

The official U.S. Post Office cancellation mark will be considered primary evidence of the date of filing of tax documents and payments. If you want to keep evidence that you mailed your return on time, ask your Post Office for a Certificate of Mailing. It is NOT necessary to get a certified or registeredmail return receipt.

Hawaii has adopted the Internal Revenue Code provision to allow documents and pay- Page 5 ments delivered by a designated private delivery service to qualify for the “timely mailing treated as timely filing/paying rule.” The Department of Taxation will conform to the Internal Revenue Service listing of designated private delivery service and type of delivery services qualifying under this provision. Timely filing of mail which does not bear the U.S. Post Office cancellation mark or the date recorded or marked by the designated delivery service will be determined by reference to other competent evidence. The private delivery service can tell you how to get written proof of the mailing date.

Where to File

If you are enclosing a check ormoney order with your tax return, mail your return with payment to:

Hawaii Department of Taxation

Attn: Payment Section

P. O. Box 1530

Honolulu, Hawaii 96806-1530

If you are NOT enclosing a check or money order with your tax return, mail your return to:

Hawaii Department of Taxation

P. O. Box 3559

Honolulu, Hawaii 96811-3559

If two pre-addressed envelopes were received with your forms, please use the appropriate envelope as stated above.

Where to Get Information

Taxpayer Services Branch

Website: www.hawaii.gov/tax

E-mail: Taxpayer.Services@hawaii.gov

Telephone: 808-587-4242

Toll-Free: 1-800-222-3229

Telephone for the hearing impaired: 808-587-1418

Toll-Free: 1-800-887-8974

Tax forms by Fax/Mail: 808-587-7572

Toll-Free: 1-800-222-7572

Other Information

Death of Taxpayer

Did the taxpayer die before filing a return for 2007? If so, the taxpayer’s spouse or personal representativemay have to file a return and sign it for the person who died (decedent) if the decedent was required to file a return. A personal representative can be an executor, administrator, or anyone who is in charge of the taxpayer’s property.

If the decedent did not have to file a return but either had State income tax withheld, made estimated tax payments, or is eligible for various tax credits, a return must be filed to get a refund.

If your spouse died in 2007 and you did not remarry in 2007, or if your spouse died in 2008 before filing a return for 2007, you may still file a joint return for the 2007 tax year.

A return filed for a deceased taxpayer, including a joint return with a surviving spouse, must have the word “DECEASED” written on the top middle of the return. The word “DECEASED” and the date of death also must be written after the deceased taxpayer’s first name and middle initial in the name and address area of the tax return.

Generally, the personal representative or other responsible individual must sign the return on behalf of the decedent. If a refund is due, Form N-110, Statement of Person Claiming Refund Due a Deceased Taxpayer, must be completed and attached to the return to ensure that the refund checkwill be issued in the name of the surviving spouse, personal representative, or other responsible individual instead of in the decedent’s name. A personal representative or other individual may be required to attach other documents such as the death certificate. See Form N-110 for further information.

Exception for joint returns filed by surviving spouse. If a joint return is being filed by the decedent and the decedent’s spouse, the spouse should write, “Filing as surviving spouse”, on the signature line which the decedent would have signed, and then the surviving spouse should sign his or her name on the other signature line. If a refund is being claimed on the return, Form N-110 is not required. The refund checkwill be issued to the surviving spouse

Filing a Final Return

If you are giving up your Hawaii residency at the end of the year, write the words “FINAL RETURN” on the top middle of the return.

Declaration of Estimated Tax

Basic rules. Individuals who must pay more tax than is withheld, or who have no withholding, may have to file a declaration of estimated tax and pay that tax in a lump sum or installments. Income tax obligations might not be satisfied through withholding when an individual has income not subject to withholding, such as from self-employment, rent, gains from sales of property, interest and dividend income, unemployment compensation, or distributions from deferred compensation plans.

Who Must File a Declaration on Form N-1. An individual subject to Hawaii net income tax generally must file Form N-1, Declaration of Estimated Tax for Individuals, unless: (a) his or her estimated tax liability for the taxable year, after taking into account all taxes withheld or collected at the source, is less than $500, or (b) the taxpayer did not have any tax liability for the preceding taxable year. See Form N-1 for details. FormN-1 can be filed electronically through the State’s Internet portal. For more information, go to www.ehawaiigov.org/efile.

Date and Payment of Estimated Tax. Your declaration for 2008 must be filed on or before April 20, 2008. The tax may be paid in full with the declaration, or in equal installments on or before April 20, 2008, June 20, 2008, September 20, 2008, and January 20, 2009. Each installment payment must be submittedwith a payment voucher.Make checks or money orders payable to the “Hawaii State Tax Collector”.

Penalties. If you are required to file a declaration but you fail to do so, you may be subject to penalties. See Penalties and Interest on page 29.

Multistate Tax Compact Act

Any taxpayer, other than a corporation acting as a business entity in more than one state, who is required by Hawaii Income Tax Law to file a return and whose only activities in the State consist of sales and who does not own or rent real estate or tangible personal property and whose annual gross sales in or into the State during the tax year are not in excess of $100,000, may elect to report and pay a tax of .5 percent of such annual gross sales. Taxpayers who elect the foregoing shall file Form N-310 in lieu of Form N-11.

Special Instructions for Nonresident Aliens

In certain situations, a taxpayer may be considered a nonresident alien for federal income tax purposes and a resident for Hawaii income tax purposes. In these situations, the special rules applicable to individuals who are considered nonresident aliens for federal income tax purposes will apply when the individual files a Hawaii resident income tax return. See Tax Information Release No. 97-1, “Determination of Residence Status”.

Steps for Preparing Your Return

These instructions consist of 11 steps. You should complete the first 3 steps that follow BEFORE you begin to fill in your return. Step 4, filling in the return through line 6e, begins on page 7 and ends on page 10. Step 5, filling in the rest of the return, is on page 10. The Line-By-Line Instructions for Form N-11 begin on page 10 and end on page 28. Finally, steps 6 through 11 begin on page 28. These are the steps you should take after your Form N-11, and other schedules and forms you need, are filled in. If you follow these steps and read the Line-By-Line Instructions, we feel you can fill in your return quickly and accurately. If you have any questions, call our Taxpayer Services staff.

Step 1

Get all of your income records together.

These include any FormsHW-2and federal Forms W-2 or 1099 that you received. If you don’t receive a Form HW-2 or federal Form W-2 by January 31, or if the one you get isn’t correct, please contact your employer as soon as possible. Only your employer can give you a Form HW-2 or federal Form W-2, or correct it. If you cannot get a Form HW-2 Page 6 or federal Form W-2 by February 15, please contact our Taxpayer Services staff. If you have someone prepare your return for you,make sure that person has all your income and expense records so he or she can fill in your return correctly.Remember, even if someone else prepares your return incorrectly, YOU are still responsible.

Step 2

If you plan to claim tax credits or itemize deductions, get the information and expense records you need.

These instructions tell you what credits and deductions you can claim. Some of the records you may need are:

•  
• Medical and dental payment records.
• Real estate and income tax receipts.
• Interest payment records for a home mortgage.
• Receipts for charitable contributions.

Step 3

Get any forms, schedules, or information you need.

Resident tax form and instruction packages are automatically mailed to you based on the return you filed last year, unless you request otherwise. Make sure that all the forms you need are in the package you receive.

If you need any other forms and instructions, youmay pick them up at any district tax office. Youmay also request that the forms bemailed or faxed to you. Please allow approximately 10 days for the mailing of the tax forms.Tax forms are also available on the Internet. See page 6 for the phone number to request the forms you need and for the Department’s website.

Step 4

Fill in your name, address, filing status, and exemptions.

Note: Fill in the appropriate oval above the name and address area of the tax return if you are filing a tax return for the first time or if your address or name has changed.

Note: Enter your social security number and name at the top of Form N-11, pages 2, 3, and 4. If you are married and filing a joint return, also enter your spouse’s social security number and name at the top of Form N-11, pages 2, 3, and 4.

Take the mailing label from the forms booklet or postcard we sent to you and make sure the information is correct. If any information is incorrect, do not use the mailing label. Instead, print the entries in this section.

After you have completed and checked all entries, attach your label (if the information is correct) to the return over the mailing address area where indicated. Use of the label helps us identify your account, saves processing time, and speeds refunds.

Do not attach your label to the envelope. It may get separated from your return. If you did not receive a label, print the entries in this section.

Do not use the IRS mailing label.

Note: Your social security number is no longer printed on the mailing label. You must write your social security number in the space provided on your tax return.

Note: You must write the first four letters of your last name in the boxes provided. If you aremarried, you must also write the first four letters of your spouse’s last name in the boxes provided whether joint or separate returns are filed

Name

You must use your legal name. Nicknames are not permitted. If you have changed your name because of marriage, divorce, etc., make sure you immediately notify the Social Security Administration so that the name on your tax return is the same as the name on the social security records. If these names do not match, your refund may be delayed.

If you file joint returns, write the names in the same order every year. There is a separate line for the spouse’s name.

Write any descriptions (e.g. Jr., III, etc.) after your last name

Address

Write your current mailing address in the space provided. If you receive your mail “in care of” someone else (i.e., your mail is sent to an address belonging to someone other than yourself), fill in that person’s name in the space provided.

If your address is outside the United States or its possessions or territories, enter the city in the space provided for “City, town or post office”, and enter the postal code in the space provided for “Postal/ZIP code.” Enter the province and/or state, and the name of the country in the space provided. Do not abbreviate the country name.

Important: If your address should change after you file your return, you must notify the Department in writing of your new address. Please include your social security number and your signature.Any refund checks due to you will not be forwarded to your new address by the U.S. Postal Service, and you might not receive your income tax forms and instructions next year.

Social Security Number

Write your social security number in the space provided. If you are married, you must also write your spouse’s social security number in the space provided whether joint or separate returns are filed. Your social security numbers must be written in the same order asyournamesarewrittenonyour return.

If you are an alien and was issued an individual taxpayer identification number (ITIN) by the IRS, enter your ITIN. If you have applied for an ITIN but the IRS has not yet issued the ITIN, write “Applied For” across the boxes provided for the social security number. You do not have to print only one letter in each box.

Filing Status

Fill in oval 1, 2, 3, 4, or 5 as appropriate. Fill in only one oval.

Note: More than one filing status may apply to you. Choose the one that will give you the lowest tax. Your Hawaii filing status may or may not be the same as your federal filing status.

Single

Select oval 1, Single, if on December 31, 2007, youwere unmarried, divorced, or separated from your spouse under a separate maintenance decree. State law governs whether you are married, divorced, or legally separated.

If you are married on December 31, 2007, consider yourself married for the whole year.

If your spouse died during 2007, consider yourself married to that spouse for the whole year, unless you remarried before the end of 2007.

If you are unmarried and provide a home for certain other persons, youmay be able to file as Head of Household. See Head of Household on page 8.

If youweremarried in 2007, had a child living with you, and lived apart from your spouse during the last 6 months of 2007, you may be able to file asHead ofHousehold. See Married Persons Who Live Apart on page 8.

Married Filing Joint Return

In most cases, married coupleswill pay less tax if they file a joint return. You must report all income, exemptions, deductions, and credits for you and your spouse. Both of you must sign the return, even if only one of you had income.

You and your spouse can file a joint return even if you did not live together for the whole year. Both of you are responsible for any tax due on a joint return, so if one of you doesn’t pay, the other may have to.

Note: If you and your spouse file a joint return for the year and later decide to file separately, both you and your spouse MUST file amended returns on or before the due date of the original return (April 20). You may not change your filing status from married filing jointly to married filing separately after that date.

If your spouse died in 2007 or in 2008 before filing a return for 2007, see Death of Taxpayer on page 6.

Tax Savings. If you decide not to file a joint return and plan to file a separate return, see if you can lower your tax by meeting the tests described on page 8 under Married Persons Who Live Apart. If you can, you should fill in oval 4 for Head of Household.

Special Rule for Nonresidents of Hawaii Who File a Joint Return With a Hawaii Resident. If at the end of the taxable year you were a nonresident of Hawaii (but youwere a U.S. resident) who is married to a resident of Hawaii, you may choose to file a joint return with the resident spouse. By filing a joint return, however, you and your spouse agree to be taxed on your combined worldwide income.

Special Rule forNonresident and Dual-Status Aliens. Generally, you cannot file a joint return if either spouse was a nonresident alien at any time during the tax year. However, nonresident aliens married to U.S. citizens or residents can elect to be taxed as a U.S. resident on their federal income tax return and file joint returns. If you and your spouse have made that election on your federal return, you also may choose to file a joint Hawaii return. By filing a joint return, you and your spouse agree to be taxed on your combined worldwide income.

Special Rule When One Spouse Is a Nonresident or Part-Year Resident. Ifone spouse is a resident and the couple files a joint return, both spouses are taxed onworldwide income. If at least one spouse is a part-year resident and the couple files a joint return, the couple is taxed on worldwide income for the period in which either spouse was a resident.

Note: For purposes of filing a joint return, common law marriages are not recognized under Hawaii law unless they began in a statewhich permits common law marriages.

Married Filing Separate Returns

Youmay file separate returns whether both you and your spouse had income, only one of you had income, or neither of you had income.

If you choose to file separate returns, both you and your spouse must figure your tax the same way. This means that if one of you itemizes your deductions, the other must also itemize their deductions. You each report only your own income, exemptions, deductions, and credits, and you are responsible only for the tax due on your own return.

If you file a separate return, write your spouse’s full name in the space after oval 3 and your spouse’s social security number in the space provided for that number. Also write the first four letters of your spouse’s last name in the boxes provided.

If your spouse does not file aHawaii tax return, you may be able to claim the exemptions for your spouse. See the instructions for lines 6a and 6b.

Special Rule forNonresident andDual-Status Aliens. Married nonresident aliens must file separate returns. However, nonresident aliens who aremarried to U.S. citizens or residents and who elect to be taxed as aU.S. resident may file joint returns. However, see Married PersonsWho Live Apart on this page.

Head of Household

This filing status is for unmarried individuals who provide a home for certain other persons. (Some married persons who live apart are considered unmarried. See Married Persons Who Live Apart on this page.) You can fill in oval 4 only if you were unmarried or legally separated (according to State law) under a decree of divorce or separate maintenance at the end of 2007 and either 1 or 2 below applies.

1. You paid over half the cost of keeping up a home that was the main home for all of 2007 of your parent whom you can claim as a dependent, except under a multiple support agreement (see page 10). Your parent did not have to live with you.
2. You paid over half the cost of keeping up a home in which you lived and in which one of the following also lived for more than half of the year (if half or less, see Exception to Time Lived With You below).
   • Any person whom you can claim as a dependent. But do not include:
     • Your qualifying child (as defined in Step 1 on page 9) whom you claim as your dependent based on the rules for Children of Divorced or Separated Parents on page 9,
     • Any person who is your dependent only because he or she lived with you for all of 2007, or
     • Any person you claimed as a dependent under a multiple support agreement. See page 10.
   • Your unmarried qualifying child who is not your dependent.
   • Your married qualifying child who is not your dependent only because you can be claimed as a dependent on someone else’s 2007 return.
   • Your child who is neither your dependent nor your qualifying child because of the rules for Children of Divorced or Separated Parents on page 9.

If the child is not your dependent, enter the child’s name on line 4.

Dependent. To find out if someone is your dependent, see the instructions for line 6c that begin on page 9.

Exception to time lived with you. Temporary absences for special circumstances, such as for school, vacation, medical care, military service, and detention in a juvenile facility, count as time lived in the home. If the person for whom you kept up a home was born or died in 2007, you can still file as head of household as long as the home was that person’s main home for the part of the year he or shewas alive. Also see Kidnapped Child on page 10, if applicable.

Keeping up a home. To find out what is included in the cost of keeping up a home, see federal Publication 501

Note: If you received payments under the Aid to Families with Dependent Children (AFDC) program and used them to pay part of the cost of keeping up this home, youmay not count these amounts as furnished by you. Special Rule forNonresident andDual-Status Aliens.—If you were a nonresident or dual-status alien during the tax year, you cannot file as Head of Household.

Married persons who live apart. Even if you were not divorced or legally separated at the end of 2007, you are considered unmarried if all of the following apply.

• You lived apart from your spouse for the last 6 months of 2007. Temporary absences for special circumstances, such as for business, medical care, school, or military service, count as time lived in the home.
• You file a separate return from your spouse.
• You paid over half the cost of keeping up your home for 2007.
• Your home was the main home of your child, stepchild, or foster child for more than half of 2007 (if half or less, see Exception to Time Lived With You on page 10).
• You claim this child as your dependent or the child’s other parent claims him or her under the rules for Children of Divorced or Separated Parents on page 9.

Adopted child. An adopted child is always treated as your own child. An adopted child includes a child lawfully placed with you for legal adoption.

Foster child. A foster child is any child placed with you by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction. Special Rule forNonresident andDual-Status Aliens.—If you were a nonresident or dual-status alien during the tax year, the special rules for Married Persons Who Live Apart will not apply to you unless you meet all of the tests previously stated, and you are a resident of Canada or Mexico. If you are considered unmarried under these rules, you may file as a single individual rather than married filing separately. You cannot file as Head of Household.

 Qualifying Widow(er) With Dependent Child

You can fill in oval 5 and use joint return tax rates for 2007 if all of the following apply.

• Your spouse died in 2005 or 2006 and you did not remarry in 2007.
• You have a child or stepchild whom you claim as a dependent. This does not include a foster child.
• This child lived in your home for all of 2007. If the child did not live with you for the required time, see Exception to Time Lived With You below.
• You paid over half the cost of keeping up your home.
• You could have filed a joint return with your spouse the year he or she died, even if you did not actually do so.

If your spouse died in 2007, you cannot file as qualifying widow(er) with dependent child. Instead, see the instructions for Married Filing a Joint Return on page 7.

Adopted child. An adopted child is always treated as your own child. An adopted child includes a child lawfully placed with you for legal adoption.

Dependent. To find out if someone is your dependent, see the instructions for line 6c that begin on page 9.

Exception to time lived with you. Temporary absences for special circumstances, such as for school, vacation, medical care, military service, and detention in a juvenile facility, count as time lived in the home. A child is considered to have lived with you for all of 2007 if the child was born or died in 2007 and your home was the child’s home for the entire time he or she was alive. Also see Kidnapped Child on page 10, if applicable.

Keeping up a home. To find out what is included in the cost of keeping up a home, see federal Publication 501.

Note: See Death of Taxpayer on page 6 for more information.

Special Rule forNonresident andDual-Status Aliens.—The special rules for Qualifying Widow(er)WithDependent Child will not apply unless the surviving spouse meets all of the tests previously stated, and was a resident alien or U.S. citizen the year their spouse died. The residency status refers to the surviving spouse’s actual status, and not the election that some nonresident aliens make to be taxed as U.S. residents.

Exemptions

Lines 6a and 6b

Regular

You can take one exemption for yourself unless you can be claimed as a dependent on another person’s tax return. Take two exemptions if you are married and filing a joint return.

If you are married filing separately, you can take your spouse’s exemption only if your spouse is not filing a return, had no income, andwas not the dependent of someone else. If your spouse meets these qualifications, fill in the oval under line 6b.

If at the end of the taxable year, you were divorced or legally separated, you cannot take an exemption for your former spouse. If youwere separated by a divorce that is not final (interlocutory decree), you may take an exemption for your spouse if you file a joint return.

If your spouse died during the taxable year and you did not remarry before the end of the taxable year, fill in the ovals for the exemptions you could have taken for your spouse on the date of death.

Age 65 or Over

You can take the extra exemption for age 65 or over only for yourself and your spouse. You cannot take them for your dependents.

Age is determined as of December 31. However, if your 65th birthday was on January 1, 2008, you can take the extra exemption for age in 2007.

If you are married filing separately, you may NOT claim the extra exemption for age 65 or over for your spouse.

Lines 6c and 6d

Children and Other Dependents

Enter the number of your dependent children in the box for line 6c. Enter the number of other dependents in the box for line 6d. Follow the steps below to find out if a person qualifies as your dependent.

Step 1: Do You Have A Qualified Child?

A qualifying child is a child who is your:

• Son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them (for example, your grandchild, niece, or nephew), and
• Was under age 19 at the end of 2007, or under age 24 at the end of 2007 and a student, or any age and permanently and totally disabled, and
• Who did not provide over half of his or her own support for 2007, and
• Who lived with you for more than half of 2007. If the child did not live with you for the required time, see Exception to Time Lived With You on page 10.

Do you have a child who meets the conditions to be your qualifying child?

Yes. Go to Step 2.

No. Go to Step 3.

Step 2: Is Your Qualifying Child Your Dependent?

 

1. Was the child a U.S. citizen, U.S. national, or a resident of the United States, Canada, or Mexico? If the child was adopted, see Exception to Citizen Test on page 10. Yes. Go to Question 2. No. Stop. Go to FormN-11, line 7.
2. Was the child married? Yes. See Married Person on page 10. No. Go to Question 3.
3. Could you, or your spouse if filing jointly, be claimed as a dependent on someone else’s 2007 tax return? Yes. You cannot claim any dependents. No. You can claim this child as a dependent.

Step 3: Is Your Qualifying Relative Your Dependent?

A qualifying relative is a person who is your:

• Son, daughter, stepchild, foster child, or a descendant of any of them (for example, your grandchild), or Brother, sister, or a son or daughter of either of them (for example, your niece or nephew), or Father, mother, or an ancestor or sibling of either of them (for example, your grandmother, grandfather, aunt, or uncle), or Stepbrother, stepsister, stepfather, stepmother, son-in-law, daughter-in-law, father- in-law, mother-in-law, brother-in-law, or sister-in-law, or Any other person (other than your spouse) who lived with you all year as a member of your household if your relationship does not violate local law. If the person did not live with you for the required time, see Exception to Time Lived With You on page 10, and
• Who was not a qualifying child of any person for 2007, and
• Who had gross income of less than $3,400 in 2007. If the personwas permanently and totally disabled, see Exception to Gross Income Test on page 10, and
• For whom you provided over half of his or her support in 2007. But see the exceptions for Children of Divorced or Separated Parents below, and Multiple Support Agreements and Kidnapped Child on page 10.

1. Does any person meet the conditions to be your qualifying relative? Yes. Go to Question 2.No. Stop. Go to Form N-11, line 7.
2. Was your qualifying relative a U.S. citizen, U.S. national, or a resident of the United States, Canada, or Mexico? If your qualifying relative was adopted, see Exception to the Citizen Test on page 10. Yes. Go to Question 3. No. Stop. Go to Form N-11, line 7.
3. Was your qualifying relative married? Yes. See Married Person on page 10. No. Go to Question 4.
4. Could you, or your spouse if filing jointly, be claimed as a dependent on someone else’s 2007 tax return? Yes. Stop. You cannot claim any dependents.No. You can claim this person as a dependent.

Definitions and Special Rules.

Adopted child. An adopted child is always treated as your own child. An adopted child includes a child lawfully placed with you for legal adoption.

Children of divorced or separated parents. A child will be treated as being the qualifying child or qualifying relative of his or her noncustodial parent (the parent who had custody of the child for the lesser part of 2007 or did not have custody at all ) if all of the following apply.

1. The parents are divorced, legally separated, separated under a written separation agreement, or lived apart at all times during the last 6 months of 2007.
2. The child received over half of his or her support for 2007 from the parents (without regard to the rules on Multiple Support Agreements on page 10).
3. The child is in custody of one or both of the parents for more than half of 2007.
4. Either of the following applies.
   • The custodial parent signs federal Form 8332 or a substantially similar statement that he or she will not claim the child as a dependent for 2007. The noncustodial parent must attach federal Form 8332 or a similar statement to his or her tax return to claim the child as a dependent.
   • A decree of divorce or separate maintenance or written separation agreement between the parents that applies to 2007 provides that the noncustodial parent can claim the child as a dependent. If your decree or agreement went into effect before 1985, the noncustodial parent must provide at least $600 for support of the child during 2007.

If the rules above apply and this child would otherwise be the qualifying child of more than one person:

• Only the noncustodial parent can claim the child for purposes of the dependency exemption.
• Only one person can file as head of household. No other person can file as head of household unless he or she has a different qualifying child. If you and any other person claim the child as a qualifying child, the rules shown underQualifying Child ofMore Than One Person on this page will apply.

See federal Publication 501 for more details.

Exception to citizen test. If you are a U.S. citizen or U.S. national and your adopted child lived with you all year as a member of your household, that child meets the citizen test

Exception to gross income test. If your relative (including a person who lived with you all year as a member of your household) is permanently and totally disabled (defined on this page), certain income for services performed at a sheltered workshop may be excluded for this test. For details, see federal Publication 501.

Exception to time lived with you. A person is considered to have lived with you for all of 2007 if the person was born or died in 2007 and your homewas this person’s home for the entire time he or she was alive. Temporary absences for special circumstances, such as for school, vacation, medical care, military service, or detention in a juvenile facility, count as time lived with you. Also see Children of Divorced or Separated Parents on page 9, or Kidnapped Child on this page.

Foster child. A foster child is any child placed with you by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction.

Kidnapped child. If your child is presumed by law enforcement authorities to have been kidnapped by someone who is not a family member, you may be able to take the child into account in determining your eligibility for head of household or qualifying widow(er) filing status, and the deduction for dependents. See federal Publication 501.

Married person. If the person is married, you cannot claim that person as your dependent if he or she files a joint return. But this rule does not apply if the return is filed only as a claim for refund and no tax liability would exist for either spouse if they had filed separate returns. If the personmeets this exception, go to Step 2, Question 3, on page 9 (for a qualifying child) or Step 3, Question 4, on page 9 (for a qualifying relative). If the person does notmeet this exception, stop. Go to Form N-11, line 7.

Multiple support agreements. If no one person contributed over half of the support of your relative (including a person who lived with you all year as a member of your household) but you and another person(s) provided more than half of your relative’s support, special rules may apply that would treat you as having provided over half of the support. For details, see federal Publication 501.

Permanently and totally disabled. A person who, at any time in 2007, cannot engage in any substantial gainful activity because of a physical or mental condition and a doctor has determined that this condition (a) has lasted or can be expected to last continuously for at least a year, or (b) can be expected to lead to death.

Qualifying child of more than one person. If the child is the qualifying child of more than one person, only one person can claim the child as a qualifying child for (1) the dependency exemption, and (2) head of household filing status, unless the rules for Children of Divorced or Separated Parents on page 9 apply.

No other person can take any of the two tax benefits listed above unless he or she has a different qualifying child. If you and any other person claim the child as a qualifying child, the following rules will apply.

• If only one of the persons is the child’s parent, the child will be treated as the qualifying child of the parent.
• If two of the persons are the child’s parents, the child will be treated as the qualifying child of the parent with whom the child lived for the longer period of time in 2007. If the child lived with each parent for the same amount of time, the child will be treated as the qualifying child of the parent who had the higher adjusted gross income (AGI) for 2007.
• If none of the persons is the child’s parent, the child will be treated as the qualifying child of the person who had the highestAGI for 2007.

Example. Your daughter meets the conditions to be a qualifying child for both you and your mother. If you and your mother both claim tax benefits based on the child, the rules above apply. Under these rules, you are entitled to treat your daughter as a qualifying child for any of the two tax benefits listed above for which you otherwise qualify. Your mother would not be entitled to take any of the two tax benefits listed above unless she has a different qualifying child.

If you will be claiming the child as a qualifying child, go to Step 2 on page 9. Otherwise, stop; you cannot claim any benefits based on this child.

Student. A child who during any part of 5 calendar months of 2007 was enrolled as a full-time student at a school, or took a full-time, on-farm training course given by a school or a state, county, or local government agency. A school includes a technical, trade, or mechanical school. It does not include an on-the-job training course, correspondence school, or Internet school.

Birth or Death of Dependent. You can take an exemption for a dependent who was born or who died during the taxable year if he or shemet the tests for a dependent while alive. This means that a baby who lived only a few minutes can be claimed as a dependent.

Line 6e

Add the numbers you entered in the boxes 6a, 6b, 6c and 6d. Enter the total in the box on line 6e.

Step 5

Fill in your return.

Line-By-Line instructions for filling in Form N-11 begin on this page and end on page 28. Please read and follow the instructions carefully.

Rounding Off to Whole Dollars

The Department of Taxation is requiring individual taxpayers to round off cents to the nearest whole dollar for all dollar entries on the tax return and schedules. To do so, drop amounts under 50 cents and increase amounts from 50 to 99 cents to the next dollar. For example: $1.39 becomes $1 and $2.69 becomes $3. If you have to add two or more amounts to figure the amount to enter on a line, schedule, or worksheet, you may choose to use one of two methods. Once a method of rounding is established, you must use the same method throughout the return. The first method is to include the cents when adding and round off only the total. The other method is to round off each entry. For example: You received two W-2 forms, one showing Hawaii withholding of $50.55 and one showing Hawaii withholding of $185.73. For rounding method 1, show your total Hawaii withholding as $236, ($50.55 + $185.73 = $236.28 rounded to $236). For rounding method 2, show your total Hawaii withholding as $237, ($50.55 rounded to $51.00 + $185.73 rounded to $186.00 = $51 + $186 = $237).

Line-By-Line Instructions - Form N-11 

Special Note to Part-Year Residents

Form N-11 is to be filed by full-year residents only. If you were a Hawaii resident for only part of 2007, youmust file Form N-15 instead.

Income

An individual who was a Hawaii resident for the entire year is subject to income tax on his or her entire income, computed without regard to source in the State.

Line 7

Federal Adjusted Gross Income (Federal AGI)

Report the federal AGI from the appropriate line of federal Form 1040, Form 1040A, or Form 1040EZ. If you are not required to file a federal income tax return, use federal Form 1040 as a worksheet to determine the amount to report as your federal AGI.

If you are filing a joint return for federal income tax purposes and amarried filing separate return for state income tax purposes, the amount to report as your federalAGI must be calculated as if you are filing a federal married filing separate return.

If the federal AGI is a negative number, shade the minus (-) in the box to the left of the amount boxes.

Hawaii Additions to Federal AGI

Line 8

Difference Between State and Federal Wages

If the amount in Form W-2, Box 16 (State wages) is larger than Form W-2, Box 1 (Federal wages), subtract the federal wages from the state wages and enter the difference here. If you receive more than one Form W-2, add the differences from all of the forms. For example, federal employees getting Cost of Living Allowance (COLA) or Living Quarter Allowance (LQA) may see a difference that must be reported here. If you received COLA or LQA and do not see a difference between state and federal wages, enter the amount of COLA or LQA reported on your Form W-2. State or County employees who are in the contributory or hybrid plan of the Employees Retirement System also will see a difference that must be reported here.

Line 9

Interest on Out-of-State Bonds, Including Municipal Bonds

If you received interest from bonds issued by another State, or a county, city, or political subdivision of another State (including interest distributions from a mutual fund investing in these bonds), enter the interest on line 9. Do not include interest from bonds issued by the Governments of Puerto Rico, U.S. Virgin Islands, Guam, and American Samoa, or any of their political subdivisions. Also, do not include distributions of short-term or long-term gains because these amounts are included in federal AGI.

Line 10

Other Hawaii Additions to Federal AGI

This line is used to report other items that are taxed by Hawaii but are not taxed by the federal government, such as:

• Differences in the taxable portion of the Hawaii tax refund.
• Distributions and deemed distributions from Individual Housing Accounts.
• Peace Corps compensation.
• Differences in depreciation and gain.
• Compensation from temporary employment outside the United States.
• Differences in the deduction for student loan interest.
• Differences in the taxable portion of employer- provided adoption benefits.
• Qualified higher education expenses.
• Distributions from certain foreign corporations.
• Other adjustments.

These items are explained in more detail as follows.

Taxable Refund of State Income Taxes

The taxable portion of your Hawaii tax refund may be different from the amount claimed on your federal return. Use the State Tax Refund Worksheet on page 35 to figure the taxable portion of your refund and to determine if an adjustment needs to be made here.

Note: None of your refund is taxable if, in the year you paid the tax, you either (a) did not itemize deductions, or (b) elected to deduct state and local general sales taxes instead of state and local income taxes.

If you received a refund or credit in 2007 for state income taxes you paid before 2007, you may have to report it as income on your Hawaii income tax return. You should receive federal Form 1099-G, or a similar statement, showing the amount of the refund.

Any part of a refund of state or local income taxes paid before 2007 that you were entitled to receive in 2007 but chose to apply to your 2007 estimated state income tax is considered to have been received in 2007.

If you received a refund of 2006 taxes and you itemized deductions in 2006, figure the taxable portion of your refund using the State Tax Refund Worksheet on page 35. When completing the State Tax Refund Worksheet on page 35, enter an amount on line 2e only if the carryover of the residential construction and remodeling tax credit was claimed for construction or renovation costs for a residential unit that does not constitute business property.

If your refund included taxes from any previous year in which you itemized deductions, a similar calculation must be done for each previous year.

If part of your refund was interest, you should include that part in your federal Form 1040, 1040A, or 1040EZ as taxable interest income.

If your 2006 Hawaii AGI was over $100,000 ($50,000 for married taxpayers filing separately), you may be able to report a smaller amount of your tax refund as income because your itemized deductions were reduced in 2006. To compute the proper amount, see federal Publication 525, “Taxable and Nontaxable Income”, under Itemized deductions limited. In the computation, however, the Hawaii standard deduction amounts must be used, the amount of the refund due to the Hawaii credits listed in the State Tax Refund Worksheet is subtracted, and the base amount for the limitation of itemized deductions remains at $100,000 ($50,000 for married taxpayers filing separately). If you use this calculation, enter the result on line 8 of the State Tax Refund Worksheet on page 35.

If your 2006 state and local income tax refund is more than your 2006 state and local income tax deduction minus the amount you could have deducted as your 2006 state and local general sales taxes, see federal Publication 525, “Taxable and Nontaxable Income”, under Recoveries.

Individual Housing Accounts

If you purchased a principal residencewith an Individual Housing Account (IHA), or you are notified by an IHA trustee that you have received a taxable distribution, report the taxable amount on line a of the Hawaii Additions Worksheet on page 35.

• If you purchased residential property before January 1, 1990, with a distribution from an IHA, you must include in gross income in the year the property is sold, conveyed, or transferred an amount equal to the amount of the distribution, unless an election was made to include one-tenth of the distribution in gross income each year for ten years. In addition, a penalty is added to your gross income. Attach Form N-103, Sale of Your Home, to figure the additional gross income.
• If you purchased residential property after December 31, 1989, you must include in gross income one-tenth of the distribution each year for ten years. If you sell the property purchased with an IHA distribution before the end of the ten-year period, the remaining amount of the distribution not previously reported must be included in gross income in the year of sale. In addition, a penalty is added to your tax liability. Attach Form N-103, Sale of Your Home, to figure the additional tax liability.
• If you purchased residential property after December 31, 1996, with a distribution from an IHA established prior to January 1, 1990, and you have made the election to do so, you must include in gross income in the year the property is sold, conveyed, or transferred an amount equal to the amount of the distribution. In addition, a penalty is added to your gross income. Attach Form N-103, Sale of Your Home, to figure the additional gross income.
• If you use an IHA distribution for any purpose other than to purchase a first principal residence in Hawaii, or if you borrow against the IHA for such a purpose, the distribution (or the loan amount) is taxable, and a 10% penalty tax is imposed. The additional tax is the same amount shown in Box 4 of Form N-2, Distribution from an Individual Housing Account, and must be included on line 26.
• If you establish an IHA and later marry a person owning residential property, the IHA will terminate and distribute all of the assets to you. In this case, you must include the total distribution in your gross income. No penalty tax is imposed, but the 10% is still withheld. Be sure to claim thewithheld amount on line 30.
• If an individual establishes an IHA and then dies or becomes totally disabled, special rules apply. For more information, see sections 18-235-5.5(r) and (s), Hawaii Administrative Rules.

Peace Corps Compensation

If you received compensation for working with the Peace Corps, include the amount of that compensation on line c of the Hawaii Additions Worksheet on page 35.

Depreciation and Gain Adjustments

Note: Hawaii did not adopt the federal provisions for bonus depreciation, increased IRC section 179 deduction (Hawaii limit is $25,000), and inclusion of off-the-shelf computer software as property qualifying for the IRC section 179 deduction. If the bonus depreciation, increased IRC section 179 deduction, or IRC section 179 deduction for off-the-shelf computer software is claimed for federal tax purposes, you must: (a) complete a federal Form 4562 forHawaii tax purposes, (b) attach the completed federal Form 4562 to the Hawaii tax return, (c) make the necessary adjustments to the Hawaii tax return for the depreciation difference between federal and Hawaii on line d of the Hawaii Additions Worksheet on page 35, and (d) attach to the Hawaii tax return any worksheet showing the computation of the adjustments. You must also keep records of the differences in the asset’s depreciable basis for federal and Hawaii tax purposes.

If you claimed the capital goods excise tax credit, hotel construction and remodeling tax credit, technology infrastructure renovation tax credit, or drought mitigating water storage facility income tax credit, and did not include the amount of the credit as income in the year in which it is properly recognized under your method of accounting, then your adjusted basis in the assets was decreased by the amount of the credit claimed.

• If you are claiming a depreciation deduction for any such asset, multiply the depreciation percentage for this taxable year by the amount of the applicable income tax credit. Add the results for all of your assets for which the applicable income tax credit was claimed, and enter this amount on line d of the Hawaii AdditionsWorksheet on page 35.
• If you sold or otherwise disposed of any such asset, your gain or loss will be different from that reported on your federal return. The difference will be the amount of the applicable income tax credit that has not already been recovered through depreciation deductions. Enter this amount on line e of the Hawaii AdditionsWorksheet on page 35. In addition, you may need to file Form N-312, Recapture of Capital Goods Excise Tax Credit; see Form N-312 for more information.

Temporary Employment Outside the U.S.

If, while you were a Hawaii resident, you worked outside the United States and you filed federal Form 2555 or 2555-EZ to exclude some of your earned income, you need to add back the amounts here because Hawaii does not have this exclusion. On line f of the Hawaii Additions Worksheet on page 35, enter:

• The amount on Form 2555-EZ, line 18; or
• The sum of Form 2555, line 43, and Form 2555, line 48.

Student Loan Interest Deduction

The student loan interest deductionmay be different from the amount claimed on your federal return since your Hawaii modified adjusted gross income must be used in the computation instead of your federalmodified adjusted gross income, and Hawaii’s modified adjusted gross income ranges for phasing out the deduction will not be adjusted for inflation. Use the Student Loan Interest Deduction Worksheet on page 37 to determine if an adjustment needs to be made here.

Employer-Provided Adoption Benefits

The taxable portion of your employer-provided adoption benefits may be different from the amount claimed on your federal return since your Hawaii modified adjusted gross income must be used in the computation instead of your federal modified adjusted gross income, and Hawaii’s exclusion amount and modified adjusted gross income limit will not be adjusted for inflation. Use the Adoption Benefits Worksheet on page 37 to determine if an adjustment needs to be made here.

Qualified Higher Education Expenses

Hawaii has not adopted the federal provision relating to the deduction for qualified higher education expenses. If you deducted qualified higher education expenses on your federal return, include the amount you deducted on line i of the Hawaii Additions Worksheet on page 35.

Owners of Certain Foreign Corporations

Certain foreign corporations are classified as Controlled Foreign Corporations (CFCs), Passive Foreign Investment Companies (PFICs), or Foreign Personal Holding Companies (FPHCs). Federal law requires that shareholders of these foreign companies recognize certain income earned by these companies before the companies distribute dividends. Hawaii has no comparable provisions. If you own one ormore of these corporations, you had to file federal Form 5471, or you sold stock in any of these kinds of companies, you may need to make an adjustment here.

Other Adjustments

Other adjustments to federal AGI include the following:

• Hawaii has not adopted the federal provisions relating to:
  • the deduction for capital costs incurred in complyingwith environmental protection agency sulfur regulations,
  • the election for qualifying film and television productions to deduct certain production expenditures in the year the expenditure is incurred,
  • the deduction for U.S. production activities, and
  • the exclusion from income of benefits under a dependent care assistance program that increases the amount of income that is treated as having been earned by a spouse who is either a full-time student or not able to care for himself or herself.
• The special federal election for capital assets acquired in tax years beginning before January 1, 2001 (election under section 311 of the Taxpayer Relief Act of 1997) is not available for Hawaii income tax purposes.
• Taxpayers who took up residence inHawaii after attaining the age of 65 years and before July 1, 1976, and who elect to be taxed only on Hawaii source income,may have to make an adjustment here since only Hawaii source income and adjustments are included in the Hawaii adjusted gross income.

There may be other adjustments to federal AGI that are not discussed in these instructions. Such adjustments arise, for example, if a taxpayer makes an election for federal tax purposes (such as an IRC section 179 election) but does not make the same election for Hawaii tax purposes. If you believe that an additional adjustment is needed to arrive at Hawaii adjusted gross income, enter the amount of the adjustment on line j of the Hawaii Additions Worksheet on page 35, write “X” on the dotted line next to line 10, and attach an explanation to Form N-11 that includes the amount of the adjustment and how you calculated it.

Line 11

Total Hawaii Additions to Federal AGI

Add the amounts on lines 8, 9, and 10. Enter the result on this line.

Line 12

Add lines 7 and 11. Enter the result on this line. If line 12 is a negative number, shade the minus (-) in the box to the left of the amount boxes.

Hawaii Subtractions from Federal AGI

Line 13

Pensions

Hawaii does not tax qualifying distributions from an employer-funded pension plan. If you received qualifying distributions from an employer-funded profit sharing, defined contribution, or defined benefit plan, or from a government retirement system (e.g., federal civil service, military pension, state or county retirement system), enter the qualifying amount here.

Nontaxable Distributions

The following lines describe what qualifying distributions are. These qualifying distri- butions were included in your federal AGI and will be excluded on this line. For a distribution to qualify, it must be paid by a pension plan by reason of retirement, disability, or death. The pension plan does not have to be a “qualified plan” as defined in section 401 of the Internal Revenue Code.

Employer-Funded Pension Plans The following three types of distributions are not taxed by Hawaii and should be included on line 13: (1) Pension or annuity distributions from a public (i.e., government) retirement system (e.g., federal civil service annuity, military pension, state or county retirement system). (2) Distributions from a private employer pension plan received upon retirement (including early retirement and disability retirement) if the employee did not contribute to the pension plan. (3)Distributions from a pension plan at age 70-1/2 that are made to comply with the federal mandatory payout rule do qualify as a retirement payment whether or not the employee is still working full time.

Distributions from a private employer pension plan received upon retirement are partially taxed by Hawaii if the employee contributed to the pension plan

Rollover IRAs

A rollover IRA is treated as a continuation of the original plan that provided the money that is rolled over. If distributions from the original plan would be characterized as a qualified distribution, distributions out of the rollover IRA need not be reported as well.

Example - In 1997, an individual received a lump sum distribution from an employer- funded profit-sharing plan upon retirement. The individual did not contribute to the profit-sharing plan. The entire lump sum distribution was rolled over to an IRA. In 2007, the individual rolled over $50,000 from the IRA to a Roth IRA. The entire amount rolled over to the Roth IRA represents the lump sum distribution received by the individual upon retirement and earnings thereon. Since the lump sum distribution that the individual received upon retirement qualifies as a pension, the amount rolled over from the regular IRA to the Roth IRA also qualifies as a pension. Therefore, the amount rolled over to the Roth IRA is exempt from Hawaii’s income tax.

Taxable Pensions and Annuities

Early Distributions

Early distributions from a pension plan that are subject to the 10% federal penalty tax do not qualify and are taxable.

Deferred Compensation Plans

Distributions from a deferred compensation plan may be partly or fully taxable. A deferred compensation plan includes any plan in which the employee has a choice of whether to contribute money into the plan or take that amount in cash or property. Examples include 401(k) plans, salary reduction Simplified Employee Pension (SARSEP) plans, the Federal Thrift Savings Plan, and section 457 plans like the State ofHawaii Deferred Compensation Plan.

Annuity Plans

Retirement vehicles that you fund yourself, such as annuity plans and Individual Retirement Accounts (IRAs) that are not funded through a Simplified Employee Pension (SEP) plan, are considered to be your owninvestments. Distributions from these plans may be fully or partly taxable, depending on whether your IRAs include deductible or nondeductible contributions. See federal Publication 590 and federal Form 8606, for more details.

Rollover IRAs

A rollover IRA is treated as a continuation of the original plan that provided the money that is rolled over. If distributions from the original plan would be characterized as taxable, distributions out of the rollover IRA would be taxable as well.

Example - In 1997, an individual received a lump sum distribution from an employer- funded profit-sharing plan upon separation from service before retirement. The individual did not contribute to the profit-sharing plan. The entire lump sum distribution was rolled over to an IRA. In 2007, the individual rolled over $50,000 from the IRA to a Roth IRA. The entire amount rolled over to the Roth IRA represents the lump sum distribution received by the individual upon separation from service and earnings thereon. Since the lump sum distribution that the individual received upon separation from service does not qualify as a pension (the distribution is not paid upon retirement, disability, or death), the amount rolled over from the regular IRA to the Roth IRA also does not qualify as a pension. Therefore, the amount rolled over to the Roth IRA is taxable for Hawaii’s income tax.

Hybrid Plans

If you received a distribution from a plan that is partly pension and partly deferred compensation, such as a 401(k) plan with a profit sharing component or an employer matching program, a SEP plan with employer contributions as well as a salary reduction option, or a similar hybrid plan, attach Schedule J to figure the taxable amount.

Lump-Sum Distributions

If you received a lump-sum distribution from a pension plan and you are electing to use the special ten-year averaging method, attach Schedule J and Form N-152, Tax on Lump Sum Distributions, to figure the taxable amount. Note: If your lump-sum distribution included capital gain amounts, you may be able to reduce your tax by including the capital gain amounts on FormN-152 and electing the capital gains treatment. See Form N-152 Instructions for more information.

To compute the taxable portion of your annuity or pension, use Schedule J.

Caution: Certain transactions, such as loans against your interest in a qualified plan,may be treated as taxable distributions.

For more information on the taxation of pensions, see sections 18-235-7-01 to 18-235-7-03, Hawaii Administrative Rules, Tax Information Release No. 90-4, “Taxability of Benefit Payments from Pension Plan to Participants who Attain Age 70-1/2 as Required by the Internal Revenue Code Section 401(a)(9)(C)”, and Tax Information Release No. 96-5, “Taxation of Pensions Under the Hawaii Net Income Tax Law: Deferred Compensation Arrangements; Rollover IRAs; Sub-Accounts of Pension Plans; Social Security and Railroad Retirement Act Benefits; Limitation on Deductions for Contributions to a Nonqualified Plan”.

Line 14

Social Security Benefits

Hawaii does not tax Social Security or first tier Railroad Retirement Act benefits. Enter the amount from Form 1040, line 20b, or Form 1040A, line 14b.

Line 15

Military Reserve or Hawaii National Guard Duty Pay Exclusion

Hawaii does not tax the first $3,631 received by each member of the reserve components of the army, navy, air force, marine corps, coast guard of the United States of America, and the Hawaii national guard, as compensation for performance of duty as such. If you qualify, enter the smaller of:

• $3,631, or
• Your pay, as shown on Box 16 of the Form W-2 sent to you by your reserve component.

If you are married filing a joint return, and you and your spouse qualify, add the exclusions for both of you and enter the total on line 15.

Line 16

Payments to an Individual Housing Account

You may be able to deduct from your gross income up to $5,000 paid in cash during the taxable year into a trust account which is established for saving for a down payment on your first principal residence. A deduction not to exceed $10,000 shall be allowed for a married couple filing a joint return. No deduction shall be allowed on any amounts distributed less than 365 days from the date on which a contribution is made to the account. Any deduction claimed for a previous taxable year for amounts distributed less than 365 days from the date on which a contribution wasmade shall be disallowed and the amount deducted shall be included in the previous taxable year’s gross income and the tax reassessed. The account is to encourage first-time home buyers to save money for a down payment on a home.

The “first principal residence” means a residential property purchased with the payment or distribution from the individual housing account which shall be owned and occupied as the only home by an individual who did not have any previous interest in, individually, or if the individual is married, whose spouse did not own any interest in a residential property inside or outside of Hawaii within the last 5 years prior to opening the IHA.

The amounts paid in cash allowable as a deduction for all taxable years are limited to $25,000, in the aggregate, excluding interest earned or accrued. This limitation also applies to married individuals having separate accounts; the sum of such separate accounts and the deduction shall not exceed $25,000 in the aggregate, excluding interest income earned or accrued.

For more information, see section 18-235-5.5, Hawaii Administrative Rules.

Line 17

Exceptional Trees Deduction

You may deduct up to $3,000 per exceptional tree for qualified expenditures you made during the taxable year to maintain the tree on your private property. The tree must be designated as an exceptional tree by the local county arborist advisory committee under chapter 58, HRS. Qualified expenditures are those expenses you incurred to maintain the exceptional tree (excluding interest) that are deemed “reasonably necessary” by a certified arborist. No deduction is allowed in more than one taxable year out of every three consecutive taxable years. The deduction is allowed for amounts paid in taxable years beginning after December 31, 2003.

An affidavit signed by a certified arborist stating that the amount of expenditures are deemed reasonably necessary must be attached to your tax return. The affidavit also must include the following information: (1) type of tree, (2) location of tree, and (3) description and amount of expenditures made in 2007 to maintain the tree. The affidavit must be notarized.

Line 18

Other Hawaii Subtractions From Federal AGI

This line is used to report other items that are taxed by the federal government but are not taxed by Hawaii, such as:

• Interest on federal obligations, including U.S. Savings Bonds.
• Differences in the taxable portion of the Hawaii tax refund.
• Interest earned on an Individual Housing Account.
• Compensation earned by patients with Hansen’s disease.
• Expenses not allowed on your federal return because they were connected with federal credits.
• Unearned income of children that you included in your federal return, if the children are filing Hawaii returns.
• Benefits from or premiums paid to legal services plans.
• Differences in the deduction for student loan interest.
• Differences in the taxable portion of employer- provided adoption benefits.
• Certain income from a qualified high technology business.
• Interest earned by an individual development account.
• Undistributed income earned by certain foreign corporations.
• Other adjustments.

These items are explained in more detail below.

  Interest on Federal Obligations, Including U.S. Savings Bonds

If you reported for federal purposes any interest received on federal obligations, including Treasury bills and notes and U.S. Savings Bonds, enter the amount of that interest on line a of the Hawaii Subtractions Worksheet on page 35.

For more information about what kinds of obligations should be reported here, see Tax Information Release No. 84-1, “Taxability of Interest on U.S. Obligations”.

If you filed federal Form 8815: If you redeemed U.S. Savings Bonds to pay for higher education tuition and fees and excluded some or all of the interest for federal purposes, subtract the amount from Form 8815, Line 14, before entering it on line a. That amount was already excluded on your federal return.

Taxable Refund of State Income Taxes

See the instructions for line 10, Taxable Refund of State Income Taxes, on page 11. In some cases, theworksheet may call for an adjustment to be made here.

Interest on an Individual Housing Account

If you have an IndividualHousing Account, enter the interest earned by the account, as it appears on federal Form 1099-INT, on line c of the Hawaii Subtractions Worksheet on page 35.

Patients With Hansen’s Disease

Hawaii does not tax compensation by Hawaii or the U.S. to a patient affected with Hansen’s disease (also known as leprosy). Enter the amount of the qualifying compensation on line d of the Hawaii Subtractions Worksheet on page 35.

Expenses Disallowed Because They Were Connected with Federal Credits

If you are a business taxpayer; you claimed the federal Indian employment credit, the work opportunity credit, or the credit for qualified clinical testing expenses; and some of your business expenses were disallowed because you took the credits (section 280C, Internal Revenue Code), enter the amount of the disallowed expenses on line e of the Hawaii Subtractions Worksheet on page 35. Hawaii does not have those credits, and does allow the expense deductions.

Children Having Unearned Income

If you filed federal Form 8814, Parent’s Election to Report Child’s Interest and Dividends, and you are not filing Form N-814 because your child will file aHawaii tax return, enter the total amount from line 6 of federal Form(s) 8814 on line f of the Hawaii Subtractions Worksheet on page 35. Attach a copy of Form(s) 8814.

Legal Services Plans

If you received benefits from a qualified group legal services plan or if your employer contributed to a group legal services plan, and you reported these benefits or contributions as taxable income on your federal return, check with your plan to see that it qualifies under Hawaii standards. If it does, Hawaii will not tax these amounts. Enter the amount of federally taxable benefits or contributions on line g of the Hawaii Subtractions Worksheet on page 35.

Student Loan Interest Deduction

The student loan interest deductionmay be different from the amount claimed on your federal return since your Hawaii modified adjusted gross income must be used in the computation instead of your federalmodified adjusted gross income, and Hawaii’s modified adjusted gross income ranges for phasing out the deduction will not be adjusted for inflation. Use the Student Loan Interest Deduction Worksheet on page 37 to determine if an adjustment needs to be made here.

Employer-Provided Adoption Benefits

The taxable portion of your employer-provided adoption benefits may be different from the amount claimed on your federal return since your Hawaii modified adjusted gross income must be used in the computation instead of your federal modified adjusted gross income, and Hawaii’s exclusion amount and modified adjusted gross income limit will not be adjusted for inflation. Use the Adoption Benefits Worksheet on page 37 to determine if an adjustment needs to be made here.

Certain Income from a Qualified High Technology Business

• Royalties and other income derived from patents, copyrights, and trade secrets. Amounts received by an individual or a qualified high technology business as royalties and other income derived from patents, copyrights, and trade secrets (1) owned by the individual or qualified high technology business, and (2) developed and arising out of a qualified high technology business are excluded from gross income, adjusted gross income, and taxable income. If you reported these amounts for federal purposes, include that amount on line j of the Hawaii SubtractionsWorksheet on page 35.
• Stock options income from qualified high technology business. All income earned and proceeds derived from stock options or stock, including stock issued through the exercise of stock options or warrants, from a qualified high technology business or from a holding company of a qualified high technology business by an employee, officer, or director of the qualified high technology business, or investor who qualifies for the high technology business investment tax credit is excluded from income taxes. If you reported these amounts for federal purposes, include that amount on line j of the Hawaii SubtractionsWorksheet on page 35.

Individual Development Accounts

If you have an individual development account, enter the amount of interest earned by the account (as it appears on federal Form 1099-INT) on line k of the Hawaii Subtractions Worksheet on page 35.

Owners of Certain Foreign Corporations

If you own an interest in a CFC, PFIC, or FPHC, you had to file federal Form 5471, or you sold stock in any of these kinds of companies, see page 12 for further information. You may need to make an adjustment here.

Other Adjustments

Other adjustments to federal AGI include the following:

• Scholarship grants received by a student under the Nursing Scholars Program is not subject to Hawaii income tax.
• The amount of payment stipend waived by Department of Education coaches and dispensed to the school for the benefit of the coach’s team is not subject to Hawaii income tax.
• The special federal election for capital assets acquired in tax years beginning before January 1, 2001 (election under section 311 of the Taxpayer Relief Act of 1997) is not available for Hawaii income tax purposes.
• The capital loss carryover for qualified high technology businesses is 15 years.
• Taxpayers who took up residence inHawaii after attaining the age of 65 years and before July 1, 1976, and who elect to be taxed only on Hawaii source income,may have to make an adjustment here since only Hawaii source income and adjustments are included in the Hawaii adjusted gross income. 

There may be other adjustments to federal AGI that are not discussed in these instructions. Such adjustments arise, for example, if a taxpayer makes an election for Hawaii tax purposes (such as an IRC section 179 election) but does not make the same election for federal tax purposes. If you believe you are entitled to an additional subtraction to arrive at Hawaii adjusted gross income, enter the amount of the adjustment on line l of the Hawaii Subtractions Worksheet on page 35, write “X” on the dotted line next to line 18, and attach an explanation to Form N-11 that includes the amount of the adjustment and how you calculated it.

Line 19

Total Hawaii Subtractions from Federal AGI

Add the amounts on lines 13 through 18. Enter the result on this line

Line 20

Hawaii Adjusted Gross Income

Subtract line 19 from line 12. Enter the result on this line. If line 19 is larger than line 12, you may have a net operating loss.

If the Hawaii AGI is a negative number, shade the minus (-) in the box to the left of the amount boxes.

Note: Hawaii did not adopt the 5-year net operating loss carryback provision of the Job Creation and Worker Assistance Act (Public Law No. 107-147).

Note: If you carry back the loss and are due a refund from the carryback, you may use Form N-109, Application for Tentative Refund from Carryback of Net Operating Loss, to get a quick refund. But if you elect to carry the loss forward instead, youmust attach a statement to this effect on a timely filed return (including extensions). If you make such an election, it cannot be changed later.

Deductions and Taxable Income Computation

Note: If you can be claimed as a dependent on another person’s return, fill in the oval above line 21. Complete the “Standard Deduction for Dependents” worksheet on page 20 and enter the appropriate amount on line 22 if you do not itemize your deductions.

Lines 21a to 21f

Itemized Deductions

Taxpayers who itemize their deductions may deduct certain kinds of expenses from their adjusted gross income.

Taxpayers who do not itemize their deductionsmay reduce their adjusted gross income by the amount of the standard deduction appropriate to their filing status. The amount of the standard deduction is determined on line 22.

You will fall into one of the following three classes:

• You MUST itemize deductions,
• You choose to itemize, or
• You do not itemize.

The three classes are described as follows:

You MUST Itemize Deductions

You must itemize deductions if:

• You are married, filing a separate return, and your spouse itemizes.
• You are making a return under IRC section 443(a)(1) for a period of less than 12 months because of a change in your annual accounting period.

You Choose to Itemize

You may choose to itemize your deductions if you are:

• Married and filing a joint return, or a qualifying widow(er) with dependent child, and your itemized deductions are more than $4,000.
• Married and filing a separate return, or Single, and your itemized deductions are more than $2,000.
• Head of Household, and your itemized deductions are more than $2,920.
• A dependent of another taxpayer and your itemized deductions are more than the greater of (1) $500 or (2) your earned income up to the amount of the standard deduction for your filing status.

You Do Not Itemize

If your itemized deductions are less than the amount shown above for your filing status (or you choose not to itemize), go to line 22 and enter your standard deduction amount there (unless you MUSTitemize as described earlier).

If you itemize, you can deduct part of your medical and dental expenses, and amounts you paid for certain taxes, interest, contributions, casualty and theft losses, and other miscellaneous expenses. These deductions are explained on the pages that follow.

If you do itemize, complete Worksheets A-1 through A-6 and enter the amounts on Form N-11, lines 21a to 21f.

Line 21a

Medical and Dental Expenses

Before you can figure your total deduction for medical and dental expenses, you must first figure your adjusted gross income.

If you itemized deductions on your 2007 federal return, enter the number from line 1 of federal Form 1040, Schedule A on Worksheet A-1, line 1.

If you did not itemize on your 2007 federal return, consult the instructions below to see which medical and dental expenses you may deduct.

Only that part of your medical and dental expenses that is more than 7.5% of your Hawaii adjusted gross income is deductible. To figure this amount, use Worksheet A-1.

On Worksheet A-1, line 1, include medical and dental bills you paid for:

• Yourself;
• Your spouse;
• All dependents you list on your return;
• Your child whom you do not claim as a dependent because of the rules explained on page 9 for Children of Divorced or Separated Parents; and
• Any person that you could have listed as a dependent on your return if that person had not received $3,400 or more of gross income or had not filed a joint return.

Example—You provided more than half of your mother’s support but cannot list her as a dependent because she received $3,400 of wages during 2007. If part of your support was the payment of her medical bills, you can include that part in your medical expenses.

You should include all amounts you paid during 2007, but do not include amounts repaid to you, or paid to anyone else, by hospital, health or accident insurance, or by your employer, or paid through a medical savings account or health savings account.

Examples of Medical and Dental Payments You CAN Deduct

To the extent you were not reimbursed, you can deduct what you paid for:

• Qualified long-term care services.
• Premiums for qualified long-term care contracts, subject to dollar limitations based on a person’s age. See the federal instructions to Form 1040 for the dollar limits.
• Hospital, medical, dental, and extra Medicare (Medicare B) insurance.
• Prescription drugs and insulin.
• Medical doctors, dentists, eye doctors, gynecologists, chiropractors, osteopaths, podiatrists, psychiatrists, psychologists, physical therapists, acupuncturists, and psychoanalysts (medical care only).
• Medical examinations, X-ray and laboratory services, insulin treatment, and whirlpool baths the doctor ordered.
• Nursinghelp. Ifyoupaysomeone todoboth nursing and housework, you can deduct only the cost of nursing help.
• Hospital care (including meals and lodging), clinic costs, lab fees.
• Medical treatment at a center for drug or alcohol addiction.
• Medical aids such as hearing aids (and batteries), false teeth, eyeglasses, contact lenses, braces, orthopedic shoes, crutches, wheelchairs, guide dogs and the cost of maintaining the dogs.
• Ambulance service and other travel costs to get medical care. If you used your own car, you can claim what you spent for gas and oil to go to and from the place you received medical care; or you can claim 20 cents a mile. Add parking and tolls to the amount you claim under either method.
• Cosmetic surgery or procedure that is necessary to correct a deformity arising from, or directly related to:
  • A congenital abnormality;
  • a personal injury resulting from an accident or trauma; or
  • a disfiguring disease.

Examples of Medical and Dental Payments You CANNOT Deduct

You cannot deduct the following:

• The basic cost of Medicare insurance (Medicare A). Note: If you are 65 or over and are not entitled to social security benefits, you may deduct premiums you voluntarily paid for Medicare A coverage.
• Life insurance or income protection policies.
• The 1.45% hospital insurance benefits tax withheld from your pay as part of the social security tax or paid as part of the self-employment tax.
• Nursing care for a healthy baby. (You may qualify for the child care credit; see Schedule X, Part III.)
• Illegal operations or drugs.
• Nonprescription medicines or drugs.
• Travel your doctor told you to take for rest or change.
• Funeral, burial, or cremation costs.
• Amounts paid for cosmetic surgery which is directed at improving the appearance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease.

Note: If expenses for cosmetic surgery are NOT deductible as medical expenses, then amounts paid for insurance coverage for such expenses are NOT deductible. Furthermore, if an employer health plan reimburses you for such expenses, the reimbursement must be included in your gross income.

Line 21b

Taxes

Certain taxes you paid during the year can be deducted.

If you itemized deductions on your 2007 federal return, you may enter the same amount from Form 1040, Schedule A, line 9 on line 21b.

Exception: If you are a federal employee receiving a Cost Of Living Allowance (COLA), not all of your Hawaii income taxes are deductible for federal purposes. (See IRS Revenue Ruling 74-140, 1974-1 C.B. 50, for more information.) Enter on line 5 of Worksheet A-2 on page 35 the entire amount of state and local income taxes you paid in 2007, even if you reported a different amount on line 5 of federal Form 1040, Schedule A. Enter the amounts from lines 6, 7, and 8 of federal Schedule A on lines 6, 7, and 8, respectively, of Worksheet A-2

If you did not itemize deductions on your 2007 federal return, complete Worksheet A-2.

Taxes You CAN Deduct

State and Local Income Taxes

Include on this line:

• State and local income taxes withheld from your salary (as shown on your Form W-2) and withheld from your unemployment compensation (as shown on your Form 1099-G), estimated tax payments made in 2007, and payments made in 2007 for a prior year;
• Any part of a prior year refund of state or local income taxes that you chose to have credited to your 2007 estimated state or local income taxes; and
• The NET amount of taxes withheld from the sale of Hawaii real property interests.

Do not reduce your deduction by any tax refund or credit for prior year state and local income taxes you received in 2007. See instead the instructions for line 10

For more information about the treatment of taxes withheld from the sale of real property interests, see Tax Information Release No. 2002-2, “Withholding of State Income Taxes on the Disposition of Hawaii Real Property”.

State and Local General Sales Taxes

Note: For purposes of the deduction for state and local general sales taxes, Hawaii’s general excise tax will qualify as a “sales tax.”

If you elect to deduct state and local general sales taxes, check box b on line 5 of Worksheet A-2. To figure your deduction, you can use either your actual expenses or the optional sales tax tables.

Actual Expenses. Generally, you can deduct the actual state and local general sales taxes (including compensating use taxes) you paid in 2007 if the tax rate was the same as the general sales tax rate. However, sales taxes on food, clothing, medical supplies, and motor vehicles are deductible as a general sales tax even if the tax rate was less than the general sales tax rate. Sales taxes on motor vehicles are also deductible as a general sales tax if the tax rate was more than the general sales tax rate, but the tax is deductible only up to the amount of tax that would have been imposed at the general sales tax rate. Motor vehicles include cars, motorcycles, motor homes, recreational vehicles, sport utility vehicles, trucks, vans, and off-road vehicles. Also include any state and local general sales taxes paid for a leased motor vehicle.

Do not include sales taxes paid on items used in your trade or business

Note: You must keep your actual receipts showing general sales taxes paid to use this method.

Refund of general sales taxes. If you received a refund of state or local general sales taxes in 2007 for amounts paid in 2007, reduce your 2007 state and local general sales taxes by this amount. If you received a refund of state or local general sales taxes in 2007 for prior year purchases, do not reduce your 2007 state and local general sales taxes by this amount. But if you deducted your state and local general sales taxes in the earlier year and the deduction reduced your tax, you may have to include the refund in income on line 10 (if not already included on line 7). See Recoveries in federal Publication 525 for details.

Optional Sales Tax Tables. Instead of using your actual expenses, you can use the tables in the instructions for federal Form 1040 to figure your state and local general sales tax deduction. You may also be able to add the state and local general sales taxes paid on certain specified items.

To figure your state and local general sales tax deduction using the tables, see the instructions for federal Form 1040.

Real Estate Taxes

Include taxes that you paid on property you own that was not used for business.

If your mortgage payments include your real estate taxes, deduct only the amount equal to the real estate taxes actually paid by the mortgage company to the taxing authority.

Personal Property Taxes Include personal property tax you paid, but only if it is based on value alone and it is charged on a yearly basis.

Note: Hawaii does not have a personal property tax. However, you may include personal property taxes you paid to other states.

Other Taxes

If you had any deductible tax not listed on Worksheet A-2, lines 5, 6, or 7 (such as foreign income taxes), write the amount on Worksheet A-2, line 8.

Taxes You CANNOT Deduct

• Federal income tax.
• Social security tax (FICA).
• Medicare tax.
• Railroad retirement tax (RRTA).
• Federal excise tax on personal property, transportation, telephone, and gasoline.
• Customs duties.
• Federal estate and gift taxes. (However, see Miscellaneous Deductions on page 19.)
• Certain state and local taxes, including:
  1. Tax on gasoline.
  2. Hawaii motor vehicle registration fees, including car inspection fees.
  3. Tax on liquor, beer, wine, cigarettes, and tobacco.
  4. Assessments for sidewalks or other improvements to your property.
  5. Taxes paid for your business or profession. (These business taxes are deducted elsewhere.)
  6. Tax you paid for someone else.
  7. License fees. (Marriage, driver’s, dog, hunting, auto, etc.)
  8. Inheritance tax.

Line 21c

Interest You Paid

Note: Act 84, Session Laws of Hawaii 2007, adopts the federal provision that treats mortgage insurance premiums as home mortgage interest.

If you itemized deductions on your 2007 federal return, you may write the amount from line 15 of your 2007 federal Schedule A on line 21c. You need not complete Worksheet A-3 on page 35. Exception:

• If you had to file a 2007 federal Form 4952, youmust refigure your investment interest deduction for state tax purposes on Hawaii Form N-158. Enter the amount from Form N-158 on line 14 ofWorksheet A-3. Enter the amounts from lines 10, 11, 12, and 13 of federal Form 1040, Schedule A, on the corresponding lines of Worksheet A-3. Attach Form N-158 to your return.
• If you filed a 2007 federal Form 8396, and you reduced your deduction for home mortgage interest on federal Form 1040, Schedule A, by the amount on line 3 of federal Form 8396, you must refigure your home mortgage interest for state tax purposes. Include the amount from line 3 of federal Form 8396 on line 10 of Worksheet A-3. Enter the amounts from lines 11, 12, 13, and 14 of federal Form 1040, Schedule A, on the corresponding lines of Worksheet A-3.

If you did not itemize deductions on your 2007 federal return, complete Worksheet A-3.

You should show on Worksheet A-3 interest on non-business items only. Business-related interest is deducted elsewhere.

Except for certain mortgage interest, the amount of your personal interest expense (such as credit card interest) is not allowed as an itemized deduction on Worksheet A-3.

Home Mortgage Interest

In most cases, you will be able to deduct all of your home mortgage interest. The following rules apply to any loans secured by your main home, including first and second mortgages, home equity loans and refinanced mortgages. Whether your homemortgage interest is deductible depends on the date you took out the mortgage, the amount of the mortgage and your use of its proceeds.

If ALL of your mortgages fit into one or more of categories a, b, and c below, you can deduct all of the interest on those mortgages and report it on Worksheet A-3, line 10 or 11, whichever applies. If one or more of your mortgages does not fit into any of the categories below, get federal Publication 936, Limits on Home Mortgage Interest Deduction, to figure the amount of interest you can deduct.

1.  Mortgages you took out on your main home ON or BEFORE October 13, 1987. These mortgages also include line-of-credit mortgages you had on October 13, 1987, and mortgages you had on October 13, 1987, that you refinanced after that date. But see Special Rules if you refinanced or borrowed additional amounts on a line-of-creditmortgage after October 13, 1987.
2.  Mortgages you took out on your main home AFTER October 13, 1987, to buy, build, or improve your home, but only if these mortgages plus any mortgages in a. above totaled $1 million or less throughout 2007. The limit is $500,000 or less if married filing separately.
3.  Mortgages you took out AFTER October 13, 1987, on yourmain home, OTHER THAN to buy, build, or improve your home, but only if these mortgages totaled $100,000 or less throughout 2007. The limit is $50,000 or less if married filing separately.

An example of a mortgage used for purposes other than to buy, build, or improve your home is a home equity loan you used to pay off credit card bills, to buy a car, or to pay tuition costs.

Special Rules

Refinanced Mortgages. If you had a mortgage on your home on October 13, 1987, and refinanced it after that date for no more than the balance of the existing mortgage, all of the new mortgage is treated as a mortgage described in a above. But, if you refinanced it for more than the balance of the existing mortgage, only the part of the new mortgage equal to the amount you owed on the mortgage at the time you refinanced is treated as a mortgage described in a. The part of the new mortgage that is more than the balance of the existing mortgage is amortgage described in b or c (or b and c if a mixed-use mortgage— see below).

Line-of-Credit Mortgages. If you had a line-of-credit mortgage on your home on October 13, 1987, and you borrowed additional amounts on this line of credit after that date, the additional amounts borrowed are treated as a mortgage taken out after October 13, 1987, and are subject to the rules under b or c (or b and c if a mixed-use mortgage—see below).

Mixed-Use Mortgages. If you took out a newmortgage after October 13, 1987 (including refinancing for more than what you owe or borrowing additional amounts on a line-of-credit mortgage you had on October 13, 1987) for purposes described in both b and c above, you have a mixed-usemortgage. Themortgage proceeds used to buy, build, or improve the home fit into category b and the rest of the proceeds fit into category c

Example: You took out a mortgage on your home for $200,000 in 1980. You file as single for 2007. In March 2007, when the home had a fair market value of $400,000 and you owed $195,000 on the mortgage, you took out a home equity loan for $120,000. In 2007, you used $90,000 of the home equity loan proceeds for home improvements, and $30,000 for other purposes. You can deduct all of the interest on both mortgages. The first mortgage qualifies because it was taken out on or before October 13, 1987. The home equity loan qualifies under the dollar limits in b and c. The part of themortgage subject to the dollar limit in b ($90,000) plus the first mortgage of $195,000 totaled less than $1 million. The part of the mortgage subject to the dollar limit in c ($30,000) was less than $100,000.

Note: Additional limits apply if the total amount of all mortgages exceeds the fair market value of the home. See federal Publication 936.

What is a Home. A home may be a house, condominium, cooperative, mobile home, boat, or similar property. It must provide basic living accommodations including sleeping space, a toilet, and cooking facilities.

More Than One Home. If you had a mainhome and a second home, the dollar limits explained in b and c above apply to the total mortgages on both homes.

Qualified Mortgage Insurance Premiums

Premiums that you pay or accrue for “qualified mortgage insurance” during 2007 in connection with home acquisition debt on your qualified home are deductible as home mortgage interest. The amount you can deduct is reduced by 10% (.10) for every $1,000 or fraction thereof ($500 or fraction thereof if your filing status is married filing separately) by which your adjusted gross income exceeds $100,000 ($50,000 if your filing status is married filing separately).

For the definitions of home acquisition debt and qualified home, see federal Publication 936, Home Mortgage Interest Deduction.

Qualified mortgage insurance. Qualified mortgage insurance is mortgage insurance provided by theVeteransAdministration, the Federal Housing Administration, or the Rural Housing Administration, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006).

Special rules for prepaid mortgage insurance. If you paid premiums for qualified mortgage insurance that are properly allocable to periods after the close of the taxable year, such premiums are treated as paid in the period to which they are allocated. No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term (except in the case of qualified mortgage insurance provided by the Department of Veterans Affairs or Rural Housing Administration).

Mortgage insurance premiums you paid or accrued on any mortgage insurance contract issued before January 1, 2007, are not deductible as home mortgage interest.

Mortgage insurance premiums you paid or accrued after December 31, 2007, or that are properly allocable to any period after December 31, 2007, are not deductible as home mortgage interest.

Example: For the 2007 tax year, H and W, married taxpayers, pay $2,000 for qualified mortgage insurance. For that tax year,Hand Wfile a joint return that shows adjusted gross income (AGI) of $106,419. As a result, H and W’s deduction for qualified mortgage insurance must be reduced by 70% of the otherwise deductible amount – 10% for each of the six full $1,000 amounts by which their AGI exceeds $100,000, and an additional 10% for the additional fraction of $1,000 ($419) by which theirAGI exceeds $100,000.Hand W’s deduction for qualified mortgage interest is therefore $600 ($2,000 – (70% x $2,000) = $2,000 - $1,400 = $600).

You may use the QualifiedMortgage Insurance Premiums Deduction Worksheet in the instructions to federal Form 1040 to compute the amount of the deduction. In the computation, however, the Hawaii adjusted gross income amount must be used.

Investment Interest

Investment interest is interest paid on money you borrowed that is allocable to property held for investment. It does not include any interest allocable to a passive activity.

Note: Expenses and interest for royalties and other income derived from any patents, copyrights, and trade secrets by an individual or a qualified high technology business are deductible.

Complete and attach Form N-158, Investment Interest Expense Deduction, to figure your deduction.

Exception. You do not have to file Form N-158 if ALL of the following apply:

• Your only investment income was from interest or dividends,
• You have no other deductible expenses connected with the production of the interest or dividends,
• Your investment interest expense is not more than your investment income,
• You have no carryovers of investment interest expense from 2006, and
• You have no passive activity losses

For more details, get federal Publication 550, Investment Income and Expenses.

Interest Expense You CANNOT Deduct

Do not include the interest you paid for

• Personal interest, such as credit cards and automobile loans.
• Indebtedness of another person, when you are not legally liable for payment of the interest.
• A gambling debt or other unenforceable obligation.
• Money you borrowed to buy tax-exempt securities or single-premium life insurance.
• Any kind of business-related interest. Business interest expenses are reported elsewhere.

See the instructions for federal Form 1040, Schedule A—Interest Expense for more information.

Line 21d

Gifts to Charity

If you itemized deductions on your 2007 federal return, write the amount from line 19 of Form 1040, Schedule A on line 21d. You need not complete Worksheet A-4 on page 35.

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