Tax Education

Who MUST File A Return:

Table Below is for 2017. Check back for updated table.

YOU MUST ALSO FILE A TAX RETURN IF:

• You are self-employed and your net profit was $400 or more.

• You are a church employee and earned $108.28 or more.

• You owe any special taxes such as the Alternative Minimum Tax, household employment taxes, Medicare and Social Security taxes on tips not reported to employer or on wages received from an employer who did not withhold these taxes.

• You received the Premium Tax Credit under the Affordable Care Act

WHO SHOULD FILE A RETURN:

• Those who had income taxes withheld from their wages. Most individuals will receive a refund of those withheld taxes

• Those who have earned income (a job or self-employment income) and who may be eligible for the earned income tax credit or additional child tax credit

• Those who qualify for the premium tax credit for health care

If your parents (or someone else) can claim you as a dependent, use the information below to see if you must file a return.

Below, EARNED INCOME includes salaries, wages, tips, and professional fees. It also includes taxable scholarship and fellowship grants.

UNEARNED INCOME includes investment-type income such as taxable interest, ordinary dividends, and capital gain distributions. It also includes unemployment compensation, taxable social security benefits, pensions, annuities, cancellation of debt, and distributions of unearned income from a trust. GROSS INCOME is the total of your earned and unearned income.

Single dependents—Were you either age 65 or older or blind?

No - You must file a return if ANY of the following applies to you:

• Your unearned income was more than $1,050

• Your earned income was more than $6,350

• Your gross income (earned plus unearned) was more than the larger of $1,050 OR your earned income (up to $6000) plus $350

Yes - You must file a return if any of the following apply.

• Your unearned income was more than $2,600 ($4,150 if 65 or older and blind).

• Your earned income was more than $7,900 ($9,450 if 65 or older and blind).

• Your gross income was more than the larger of: $2,600 ($4,150 if 65 or older and blind) OR your earned income (up to $6,000) plus $1,900 ($3,450 if 65 or older and blind).

Married dependents – see IRS Publication 17

Examples of Taxable Income

• Wages, salaries, bonuses, commissions

• Alimony

• Annuities

• Awards

• Back Pay

• Breach of contract payment

• Business Income (Self-employment income)

• Cash income

• Compensation for personal services

• Debts forgiven

• Director’s fees

• Disability benefits (employer-funded plan)

• Discounts

• Dividends

• Employee awards

• Employee bonuses

• Estate and trust income

• Farm income

• Fees

• Gains from sale of property or securities

• Gambling winnings

• Hobby income

• Interest

• Interest on life insurance dividends

• IRA distributions

• Jury duty fees

• Military pay (not exempt from taxation)

• Military pension

• Nonemployee compensation

• Notary fees

• Partnership, Estate and S-Corporation income (Schedule K-1s, Taxpayer’s share)

• Pensions

• Prizes

• Punitive damage award

• Railroad retirement – Tier 1 (portion may be taxable)

• Railroad retirement – Tier II

• Recovery of prior year deducation (medical, property taxes, etc.)

• Refunds of State and local income tax (if taxpayer itemized in year the taxes were paid and taxes were reduced because of deduction)

• Rents (gross rent)

• Rewards

• Royalties

• Severance pay

• Self-employment (gross income)

• Social security benefits – portion may be taxable

• Supplemental unemployment benefits

• Taxable scholarships and grants

• Tips and gratuities

• Tribal per capita payments

• Unemployment compensation

There are five filing statuses on a federal tax return. The most common are "Single," "Married Filing Jointly" and "Head of Household." The Head of Household status may be the one most often claimed in error.

The IRS offers these seven facts to help you choose the best filing status for you. Your marital status on the last day of the year is your marital status for the entire year.

1. Single Filing Status. Single filing status generally applies if you are not married or are divorced or legally separated according to state law.

2. Married Filing Separately. If a married couple decides to file their returns separately, each person’s filing status would generally be Married Filing Separately. DON'T use this filing status if you are doing so just to avoid seizure of back child support. See Child Support section. If your spouse died during the tax year, you usually may still file a joint return for that year. Also, when it comes to married filing separately, both spouses must choose the same method of recording deductions. If one spouse decides to itemize deductions, then the other spouse must do so as well, even if his or her itemized deductions are less than the standard deduction. If you are married and choose to file tax returns separately from your spouse, you CANNOT claim the following credits:

• Earned income credit

• Child tax credit

• Child and dependent care credit

• Student loan interest deduction

• Elderly and disabled credit

• All deductions and credits of every kind relating to education, such as the Hope and Lifetime Learning Credits, student loan interest deduction and tuition and fees deduction

3. Head of Household. The Head of Household status generally applies if you are not married and have paid more than half the cost of maintaining a home for yourself AND a qualifying person.

4. Qualifying Widow(er) with Dependent Child. This status may apply if your spouse died during the two years prior to the tax year AND you have a dependent child AND you meet certain other conditions.

You can get a 6-month extension of time to file a tax return but this extension applies only to the filing of the return, not the payment of taxes due. Taxes must still be paid by the deadline to file your tax return.

Use Form 4868 to request an extension of time to file a tax return.

The IRS is entitled to assess a penalty if you fail to file a tax return, fail to pay taxes due, or both.

Failure to file:

• The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes.

• If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to pay:

If you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes.

THINGS TO NOTE: Since penalties are assessed on the amount of UNPAID taxes, if you do not owe taxes there should be no penalties assessed.

If you request an extension of time to file by the tax deadline and you paid at least 90 percent of your actual tax liability by the original due date, you will not face a failure-to-pay penalty if the remaining balance is paid by the extended due date.

If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

INTEREST: The IRS can assess interest as well on any unpaid tax from the time that the payment of tax was due until the date the tax is paid. Interest rates are set by the IRS every three months.

Whenever you begin employment, you are required to fill out a Form W-4 for your employer on which you indicate how many exemptions you are claiming.

The more exemptions you claim, the less taxes are withheld from your pay. HOWEVER, you can be assessed a $500 penalty if both of the following apply:

• You make statements or claim withholding allowances on your Form W-4 that reduce the amount of tax withheld.

• You have no reasonable basis for those statements or allowances at the time you prepare your Form W-4.

• A criminal penalty of a fine up to $1,000 or imprisonment for up to 1 year, or both, can also be imposed if you deliberately and knowingly supply false or fraudulent information on your Form W-4 or you deliberately fail to provide required information that would have increased the amount withheld. A simple error or an honest mistake will not result in one of these penalties.

The income tax system of the United States is a pay-as-you-go system, which means that you must pay tax as you earn or receive your income during the year. It is NOT enough to settle up with the IRS when you file your tax return. If you fail to pay your tax as it becomes due or you pay too little, you may have to pay a penalty for underpayment of estimated tax. There are exceptions to this rule. Generally, you do not have to pay an underpayment penalty if:

• You do not owe a penalty if the total tax shown on your return minus the amount you paid through withholding (including excess social security and tier 1 railroad retirement (RRTA) tax withholding) is less than $1,000 OR

• You had no tax liability last year OR

• You paid, through withholding or estimated tax payments, at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller

The law also allows the IRS to waive the penalty if:

• You did not make a required payment because of a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or

• You retired (after reaching age 62) or became disabled during the tax year for which you should have made estimated payments or in the preceding tax year, and the underpayment was due to reasonable cause and not willful neglect.

There are special rules for farmers and fishermen, certain household employers and certain higher income taxpayers. Please refer to Publication 505, Tax Withholding and Estimated Tax, for more information.

Under the Passport Denial Program, states certify cases in which the non-custodial parent (NCP) owes more than $2,500 in past due child support. The Federal Office of Child Support Enforcement (OCSE) transmits the information to the Department of State so that a U.S. passport will not be issued or renewed to someone who is not supporting his or her children.

A non-custodial parent (NCP) who is delinquent in payment in an amount equal to or greater than the sum of payments for child support for a three-month period is subject to having his/her driver’s license and/or recreational license(s) suspended. If the NCP is delinquent in payment in an amount equal to or greater than the sum of payments for child support for a six-month period, his/her professional and/or vocational license(s) is subject to being suspended.

Go here to see FAQs about child support: http://ag.hawaii.gov/csea/faqs/enforcement-of-child-support/

INJURED SPOUSE FORM - If you work and your spouse owes back child support, you can still file married filing jointly and claim all tax credits for which you are eligible by filing an injured spouse form. (FORM 8379) IRS will seize only the portion of refund that it determines belongs to your spouse.

When you file an injured spouse form, the IRS will calculate the portion of the refund attributable to you and the portion attributable to your spouse. The IRS will then withhold only the portion of the refund that is deemed to be due to your spouse.

In completing Form 8379, be aware that Hawaii is NOT a community property state.

For Hawaii: Withholding for delinquent child support can only be made against the person responsible for the payment of the support. The non-debtor spouse (NDS) may request a refund of his/her portion of the tax refund by writing to the Child Support Enforcement Agency at one of the branch locations. Since the agency will calculate the non-debtor spouse’s portion of the tax refund, a copy of the filed Hawaii income tax return must be included with the request.

If you settled a debt owed to a creditor (credit card company, bank, etc.) or you owe a creditor money and stopped paying but the creditor decides not to pursue that debt, the amount of the “forgiven” debt is considered income to you and taxable.

All forgiven amounts should be reported but if the amount of the forgiven debt is more than $600, you will receive a 1099-C from the creditor. This document is sent to the IRS by the creditor and you should present it to the tax return preparer.

Example: A person with $12,000 in credit card debt who negotiates to pay only $7,000 of the balance would have $5,000 in forgiven debt income. The $5,000 must be reported as “other income” on Line 21 of the 1040 tax form. Depending on the amount of the debt that is forgiven, the taxpayer’s other income, deductions and other such factors, the taxpayer could be facing a large tax bill at tax time.

There are five main exceptions to the taxability of this type of debt. The exceptions include:

• A mortgage on a principal residence (this exception expired on December 31, 2016 and is not applicable in 2017)

• Bankruptcy

• Insolvency

• Farming activity debt and

• Non-recourse loans (this is a debt that is secured by some sort of collateral and the creditor agrees that in the event of default, they will take thecollateral and sell it to pay off the debt but if the sale does not cover the entire amount owed, they will not seek payment from the person who owed the debt).

If an exception applies, Form 982 should be filed with the tax return to allow the taxpayer to report the 1099-C income as non-taxable income.

NOTE: Certain student loans can qualify for an exemption. If a student enters into an agreement with the lender to work in an approved occupation for a specified period of time and does so, this could result in a cancellation of the student loan debt. If cancellation occurs, the student will receive a 1099-C but can file Form 982 and claim the unpaid debt as non-taxable income.

Scholarships, fellowship grants, and other grants are tax-free if

(1) you use the funds to pay for tuition, fees required for enrollment, or for fees, books, supplies, and equipment required for courses AND

(2) you are a candidate for a degree at an educational institution that has a regular faculty and curriculum and enrolled body of students in attendance.

HOWEVER, if you use scholarship or grant funds to pay for other things (room and board, travel, other living expenses, optional equipment for school, non-mandatory fees, etc.), the amount used for this purpose is considered taxable income.

Your school should provide you with a Form 1098-T. If you are planning on having your tax returns prepared at one of our free tax preparation sites, you will need to bring that Form 1098-T AND a printout from your account at your school that shows the amount of scholarships and/or grants that you received and the amount of tuition and fees that you paid for the entire tax year (Spring semester and Fall semester). You cannot rely only on the Form 1098-T for all of the information that you need.

EXEMPTIONS YOU CAN CLAIM WITH YOUR TAX RETURN: You may be exempt from the health care coverage requirement if:

• Your income is below the level that requires you to file a tax return (see here)

• The lowest-priced coverage available to you, through either a Marketplace or job-based plan, would cost more than 8.05% of your household income

• You were uninsured for no more than 2 consecutive months of the year

• You lived in a state that didn’t expand its Medicaid program but you would have qualified if it had (Hawaii DID expand its Medicaid program)

• You’re a member of a federally recognized tribe or eligible for services through an Indian Health Services provider

• You’re a member of a recognized health care sharing ministry.

• You’re a member of a recognized religious sect with religious objections to insurance, including Social Security and Medicare

• You’re incarcerated (in prison or jail)

• You’re a U.S. citizen living abroad, a certain type of non-citizen, or not lawfully present in the United States

HARDSHIP EXEMPTIONS YOU MUST APPLY FOR. To claim a hardship exemption, you must fill out a PAPER application and mail it in to the Marketplace.

Hardships that may qualify you for exemptions include:

• You were homeless

• You were evicted in the past 6 months or were facing eviction or foreclosure

• You received a shut-off notice from a utility company

• You recently experienced domestic violence

• You recently experienced the death of a close family member

•You experienced a fire, flood, or other natural or human-caused disaster that caused substantial damage to your property

• You filed for bankruptcy in the last 6 months

• You had medical expenses you couldn’t pay in the last 24 months that resulted in substantial debt

• You experienced unexpected increases in necessary expenses due to caring for an ill, disabled, or aging family member

• You were determined to be ineligible for Medicaid because your state did not expand eligibility for Medicaid under the Affordable Care Act (Hawaii DID expandMedicaid eligibility)

• As a result of an eligibility appeals decision, you’re eligible for enrollment in a qualified health plan (QHP) through the Marketplace, lower costs on yourmonthly premiums, or cost-sharing reductions for a time period when you weren’t enrolled in a QHP through the Marketplace

• Your individual insurance plan was cancelled and you believe other Marketplace plans are unaffordable

Go here: https://www.healthcare.gov/exemptions-tool/#/ Answer some questions, and the site will match you with exemptions you MAY qualify for.

Unemployment benefits are considered taxable income. Taxes are not automatically withheld from unemployment benefits – you must elect to have taxes withheld. In order to avoid owing taxes when you file your tax return, request that taxes be withheld from your benefits. According to the State of Hawaii’s Unemployment Insurance Division, you can elect to withhold 10% for federal taxes and 5% for Hawaii state taxes from your benefits. After the end of the year, you will receive a Form 1099-G from the Unemployment Insurance Division which will show the total benefits paid and any federal or state income taxes withheld during the calendar year. You need to show this Form to your tax preparer. If you had to make any repayments of unemployment benefits because you were overpaid, you need to keep track of this on your own since the Unemployment Insurance Division does not make an adjustment on your Form 1099-G.

Unemployment benefits can be seized by the Child Support Enforcement Agency (CSEA) if you owe back child support. If your income situation has changed since you were ordered to pay child support, you can request modification of that order. If your child support payments were based on your income while you were fully employed, contact the Child Support Enforcement Agency to inform them about the change in your employment situation and inquire about modifying your obligations. Any request for modification of child support obligations should be submitted to the CSEA in writing and “set forth the reasons for the request, including describing the substantial and material change in circumstances. The CSEA then begins administrative proceedings to modify it.”

Go here for more information: http://ag.hawaii.gov/ocsh/modification-of-a-child-support-obligation/

To contact CSEA by phone:

Oahu 808-692-8265

Neighbor Island and Out-of-State (toll-free) 1-888-317-9081

MYFREETAXES is NOT to be used by individuals who charge for their services. MyFreeTaxes is a good alternative for taxpayers who:

• Prefer to do their own taxes on their own time. The website is available 24/7 during the tax season Who have used self-preparation tax software before. Usually, even “free” file online sites will charge for the preparation of your State tax return. MyFreeTaxes allows eligible taxpayers to prepare and e-file both their federal and state tax returns for free.

• Have returns that will not qualify them for free tax services at VITA sites. Volunteer Income Tax Assistance (VITA) sites prepare and e-file both federal and Hawaii state tax returns for taxpayers whose household income does not exceed $55,000. If your household income is more than the VITA limit but less than $66,000 or you have a tax situation that is considered out-of-scope for VITA, MyFreeTaxes is a good alternative to use to save money on tax preparation.

To access MyFreeTaxes, go to https://www.unitedway.org/myfreetaxes You will need a valid e-mail address in order to be notified in the event that the IRS rejects your tax return for any reason AND all documents necessary to prepare a return.

MyFreeTaxes is operated by United Way Worldwide through a partnership with H&R Block.