Nicholas Mirkay, Associate Dean for Academic Affairs and Professor of Law at the William S. Richardson School of Law, joins producer/host Coralie Chun Matayoshi to discuss whether GoFundMe donations, Maui wildfire insurance payouts and settlements, cryptocurrency transactions, and gambling wins are taxable, the largest income tax cut in Hawaii’s history, increases to the standard deductions, and tax credits available including the child, dependent care, adoption, energy efficiency, and electric vehicle tax credits.
Q. Tax season is just around the corner, and there are some changes in the law which people should know about when filing their taxes this year. First, let’s talk about what income is taxed?
Income in the form of money, property, or services, including employee wages and fringe benefits, rent income, investment income, royalties, sale or payment in cryptocurrency, and even gambling wins.
Q. How about if you sold goods or services and received payments through apps or online marketplaces like Venmo, CashApp, Airbnb and Etsy?
You may receive a 1099-K to report income from your transactions if, combined, they exceeded $5,000 for the year.
Q. What about income from social security – is that taxed?
Federal gov’t – Generally, up to 50% of your benefits will be taxable; but you must pay taxes on up to 85% of your Social Security benefits if you file as an “individual” and your “combined income” exceeds $34,000 or if you file a joint return, and you and your spouse have “combined income” of more than $44,000.
Hawaii state – no. Hawaii exempts SS benefits & public pension income, but not income from private pensions & retirement savings accounts.
Q. What about unemployment compensation benefits – are they fully taxable as income?
Yes, during COVID there was an exemption, but it no longer applies and unemployment compensation benefits are fully taxable.
Q. What about student loan forgiveness – is that considered taxable income?
Typically loan forgiveness is included in taxable income but due to the American Rescue Plan Act of ’21, student loan debt forgiveness or discharge occurring in year 2021 through 2025 is not considered taxable income (i.e., exemption).
Q. What if someone gives you a gift – is that considered taxable income, and does it matter if it’s a parent gifting money to a grown child or someone who receives donations from a GoFundMe fundraiser?
Recipient does not have to pay income tax on the gift – it is not considered income. But the donor might have to pay a federal gift tax. As of Jan 1, 2025, a person can give $19k annually per recipient before the federal gift tax kicks in. GoFundMe contributions received, like the victims of the Aliamanu fireworks explosion, will not have to pay taxes on the income because they are considered a gift. The donors to such GoFundMe campaigns do not receive a charitable contribution.
Q. What about victims of the Maui wildfire. Do they have to pay taxes on property insurance payouts or their settlement award?
Generally, insurance claim proceeds, including settlement awards, used to cover the cost of property repairs or replacements are not considered taxable income. The purpose of these proceeds is to restore the property to its previous condition, and therefore, they are treated as a reimbursement for the loss incurred. If the reimbursement is greater than your basis (investment) in the property, you may have a taxable gain. But exclusions for your primary residence may apply to exempt any gain.
Q. Last year, the State Legislature passed the largest tax cut in Hawaii’s history which will be implemented over 7 years starting with the 2024 tax returns. In an effort to make Hawaii more affordable, we will go from the second highest in income taxes to the fourth lowest in the nation. Tell us more about this.
The new law applies to all taxpayers, and employees should have received more take-home pay in each paycheck starting in 2025 due to lower withholding of state taxes. The law expects to reduce state income taxes for 70% of working-class families and eliminate the state income tax entirely for about 40% of all state taxpayers by 2031. For example, a family of 4 making $95,000 in annual income will see a reduction in their taxes each year and save nearly $20,000 over the next seven years.
Q. Our State Legislature also increased the standard deductions for Hawaii taxpayers. First, what is a deduction?
Deductions are the amounts you can decrease from your income before tax is applied. Taxpayers can either itemize their deductions or take a flat stanardized deduction.
Itemized deductions – you deduct individual items like mortgage payments, medical expenses, state and local taxes (capped at $10,000 regardless of filing status), and charitable contributions but these items are subject to certain limitations. Not much has changed since last tax year.
Something interesting to note is that gambling losses can be deducted to the extent of gains.
Standardized deductions – you just deduct a fixed amount and don’t have to keep records and receipts of individual items like mortgage payments, medical bills, and charitable contributions.
- State – along with the historic reduction in income taxes, the Hawaii Legislature increased the standard deductions for taxpayers over the next 7 years. For tax year 2024, the $4,400 standard deduction for joint filers will increase to $8,800 and increase each year until it reaches $24,000 in 2031. Similar increases apply for single taxpayers and married individuals filing separately.
- Federal – for tax year 2024, the standard deduction adjusted for inflation increased by $1,500 to $29,200 for married couples filing jointly. For single taxpayers and married individuals filing separately, the standard deduction increased by $750 to $14,600. For heads of households, the standard deduction increased by $1,100 to $21,900.
Q. The governor also signed a more modest state excise tax measure into law last year on medical and dental services for certain people.
Yes, starting in the 2024 tax year, state excise tax on medical and dental services is eliminated for people who receive benefits under Medicaid, Medicare or the TRICARE program for the military, retirees and their dependents.
Q. Now let’s talk about tax credits – what is the difference between a tax deduction and a tax credit?
Tax deductions simply reduce the amount of your total income subject to tax, while tax credits are a dollar-for-dollar reduction of your tax owed. For example, a $1,000 deduction will only yield a tax savings of @ $350 for a taxpayer in the 35% bracket; $150 tax savings for a taxpayer in a 15% bracket. A $1,000 tax credit will save a taxpayer $1,000 in taxes regardless of their tax bracket.
There are various state and federal tax credits you can take including child tax credit, child and dependent care tax credit, adoption cost tax credit, and saving for retirement tax credit. Taxpayers who earn low to moderate income from a job or from being self-employed can take an earned income tax credit and refundable food & excise tax credit.
Q. With climate change and push to go green, are there any tax incentives for energy efficiency?
- Energy Efficient Home Improvement Credit –the Inflation Reduction Act (enacted in Aug 2022) extended and expanded tax credits available to homeowners for energy-efficient improvements. For calendar year 2024 (and thru 2032), the maximum credit is 30% of the cost of an energy efficient qualifying home improvements including home energy audits, Energy Star qualified doors and windows, and HVAC upgrades, up to $1,200 annual limit (as opposed to a lifetime limit). Previously, you could only get 10% of similar costs with a lifetime limit of $500.
- Residential Clean Energy Credit – You can get a tax credit equal to 30% of the costs of new, qualified clean energy property such as solar energy panels, solar water panels, geothermal heat pumps, and battery storage technology (for items bought between January 1, 2022 to December 31, 2032). There is no annual or lifetime dollar limit (except for fuel cell property) so you can claim an annual credit every year until the credit phases out in 2033 and 2034.
Q. Are there still some incentives to purchase electric vehicles?
As part of the Inflation Reduction Act, the new Clean Vehicle Credit can give you a nonrefundable tax credit. Beginning 2023, in order to be eligible for the credit, your adjusted gross income can’t be more than $150k if you’re single or $300k for joint married filers. There are limitations on the type of vehicle that qualifies for the tax credit – final assembly of the vehicles had to have occurred in North America for vehicles purchased after 8/17/22 per Inflation Reduction Act). More foreign companies are building EV factories in the U.S. in order to take advantage of the tax credits in the future.
If you purchased an electric vehicle, that qualifies for the clean vehicle energy credit or used clean vehicle credit, your dealer should send both you and the IRS a Form 15400 (Clean Vehicle Seller Report) which includes information to help you claim or reconcile the credit your claim on your tax return. You can also now get the tax credit applied to the purchase price of the vehicle at the time you buy it instead of having to wait until you file your taxes.
- New electric vehicles – up to $7,500 credit in year you take delivery of the EV. (MSRP) must be less than $55k for cars or $80k for vans, SUVs or trucks.
- Used electric vehicles – up to $4k or 30% of the sale price, whichever is lower. Car price must be less than $25k and at least 2 years old.
- New mineral and battery component requirements - For vehicles placed in-service April 18, 2023 and after, vehicles will have to meet all of the same criteria listed above, plus meet new critical battery component requirements. A vehicle that doesn't meet either requirement will not be eligible for a credit.
Q. What are some common mistakes people make in filing their taxes?
Filing too early before receiving all of the proper tax reporting documents, missing or inaccurate Social Security numbers, misspelled names, inaccurate figures and math mistakes, incorrect filing status, errors in tax credits and deductions, and forgetting to sign the tax return form.
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Disclaimer: this material is intended for informational purposes only and does not constitute legal advice. The law varies by jurisdiction and is constantly changing. For legal advice, you should consult a lawyer that can apply the appropriate law to the facts in your case.