RELATING TO THE HOUSEHOLD AND DEPENDENT CARE SERVICES TAX CREDIT.

HB326

HOUSE OF REPRESENTATIVES

H.B. NO.

326

THIRTY-THIRD LEGISLATURE, 2025

STATE OF HAWAII

A BILL FOR AN ACT

relating
to the household and dependent care services tax credit
.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

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SECTION 1.
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The legislature finds that the average cost
of full-time child care in Hawaii currently exceeds $13,000 per year for
working families.
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The rising cost of
child care should be reflected in the income tax credits allowed for expenses
for household and dependent care services, which include child care
services.
�
Such services facilitate the
academic and social development of young children and allow parents to obtain
stable employment, thereby increasing the economic well-being of the family as
a whole.

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The legislature further finds that
Act 163, Session Laws of Hawaii 2023 (Act 163), partially strengthened the
household and dependent care services tax credit by raising the amount of the
employment-related expenses incurred during any taxable year that may be taken
into account for the purposes of the tax credit.
�
Yet, Act 163 did not increase the maximum
percentage of household and dependent care expenses that may be claimed for the
purposes of the tax credit.
�
Without
adjusting the maximum percentage of expenses that taxpayers can claim, the
increases to the claimable amounts of the household and dependent care services
tax credit provide limited benefit to working families.

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The legislature additionally finds
that in statements to the media, public officials said that they intended to
provide approximately $47,000,000 of financial relief to working families
through the household and dependent care services tax credit under Act
163.
�
The department of taxation later
estimated the cost of the provisions of Act 163 relating to the household and
dependent care services tax credit at only about $9,500,000.
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This discrepancy can be rectified by amending
the tax credit to increase the percentage of child and dependent care expenses
for which the credit may be applied, thereby fulfilling the legislature's
original intent for Act 163.

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The purpose of this Act is to
increase the taxpayer's applicable percentage of employment-related expenses
that may be claimed for the household and dependent care services tax credit.

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SECTION 2.
�
Section 235-1, Hawaii Revised Statutes, is
amended by adding a new definition to be appropriately inserted and to read as
follows:

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"
"Cost-of-living adjustment factor" means a
factor calculated by adding 1.0 to the percentage change in the Consumer Price
Index for All Urban Consumers for all items, as published by the United States
Department of Labor, from July of the preceding calendar year to July of the
current calendar year; provided that if the Consumer Price Index is
discontinued, the Chained Consumer Price Index for All Urban Consumers, as
published by the United States Department of Labor, shall be used to calculate
the cost-of-living adjustment factor.
"

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SECTION
3
.
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Section
235-55.6, Hawaii Revised Statutes, is amended to read as follows:

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"
�235-55.6
�

Expenses for household and dependent care services necessary for gainful
employment.
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(a)
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Allowance of credit.

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(1)
�
In general.
�
For each resident taxpayer, who files an
individual income tax return for a taxable year, and who is not claimed or is
not otherwise eligible to be claimed as a dependent by another taxpayer for
federal or Hawaii state individual income tax purposes, who maintains a
household which includes as a member one or more qualifying individuals (as
defined in subsection (b)(1)), there shall be allowed as a credit against the
tax imposed by this chapter for the taxable year an amount equal to the applicable
percentage of the employment-related expenses (as defined in subsection (b)(2))
paid by the individual during the taxable year.
�

If the tax credit claimed by a resident taxpayer exceeds the amount of
income tax payment due from the resident taxpayer, the excess of the credit
over payments due shall be refunded to the resident taxpayer; provided that tax
credit properly claimed by a resident individual who has no income tax
liability shall be paid to the resident individual; and provided further that
no refunds or payment on account of the tax credit allowed by this section
shall be made for amounts less than $1.

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(2)
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Applicable
percentage.
�
For purposes of paragraph
(1), the taxpayer's applicable percentage shall be [
determined as follows:

���������
Adjusted
gross income
��������
Applicable
percentage

�����������
Not
over $25,000
������������������
25%

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Over
$25,000 but
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24%

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not over
$30,000

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Over
$30,000 but
������������������
23%

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not over
$35,000

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Over
$35,000 but
������������������
22%

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not
over $40,000

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Over
$40,000 but
������������������
21%

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not
over $45,000

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Over
$45,000 but
������������������
20%

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not
over $50,000

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Over
$50,000
����������������������
15%.
]

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equal to fifty per cent
reduced by one percentage point for each $3,000, or fraction thereof, by which
the taxpayer's adjusted gross income exceeds the threshold amount; provided
that the applicable percentage shall not be reduced below twenty-five per cent.

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(3)
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Threshold
amount.
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For purposes of paragraph (2):

���������
(A)
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For
taxable years beginning after December 31, 2024, the threshold amount shall be
$150,000; and

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(B)
�
For
each taxable year beginning after December 31, 2025, the director of
taxation, no later than December 15 of the preceding calendar year, shall recompute
the threshold amount by multiplying the dollar amount for the preceding taxable
year by the cost-of-living adjustment factor, if the cost-of-living adjustment
factor is greater than zero, and rounding off the resulting product to the
nearest $1; provided that if the cost-of-living adjustment factor is less than
or equal to zero in a given year, then no adjustment shall occur in the
following year.

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(b)
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Definitions of qualifying individual and employment-related
expenses.
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For purposes of this section:

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(1)
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Qualifying
individual.
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The term "qualifying
individual" means:

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(A)
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A dependent of the
taxpayer who is under the age of thirteen and with respect to whom the taxpayer
is entitled to a deduction under section 235-54(a),

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(B)
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A dependent of the
taxpayer who is physically or mentally incapable of caring for oneself, or

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(C)
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The spouse of the
taxpayer, if the spouse is physically or mentally incapable of caring for
oneself.

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(2)
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Employment-related
expenses.

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(A)
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In general.
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The term "employment-related
expenses" means amounts paid for the following expenses, but only if such
expenses are incurred to enable the taxpayer to be gainfully employed for any
period for which there are one or more qualifying individuals with respect to
the taxpayer:

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(i)
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Expenses for
household services, and

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(ii)
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Expenses for the
care of a qualifying individual.

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Such term shall not include
any amount paid for services outside the taxpayer's household at a camp where
the qualifying individual stays overnight.

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(B)
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Exception.
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Employment-related expenses described in
subparagraph (A) which are incurred for services outside the taxpayer's
household shall be taken into account only if incurred for the care of:

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(i)
�
A qualifying
individual described in paragraph (1)(A), or

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(ii)
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A qualifying
individual (not described in paragraph (1)(A)) who regularly spends at least
eight hours each day in the taxpayer's household.

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(C)
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Dependent care
centers.
�
Employment-related expenses
described in subparagraph (A) which are incurred for services provided outside
the taxpayer's household by a dependent care center (as defined in subparagraph
(D)) shall be taken into account only if:

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(i)
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Such center
complies with all applicable laws, rules, and regulations of this State, if the
center is located within the jurisdiction of this State; or

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(ii)
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Such center
complies with all applicable laws, rules, and regulations of the jurisdiction
in which the center is located, if the center is located outside the State; and

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(iii)
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The requirements
of subparagraph (B) are met.

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(D)
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Dependent care
center defined.
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For purposes of this
paragraph, the term "dependent care center" means any facility which:

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(i)
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Provides care for
more than six individuals (other than individuals who reside at the facility),
and

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(ii)
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Receives a fee,
payment, or grant for providing services for any of the individuals (regardless
of whether such facility is operated for profit).

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(c)
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Dollar limit on amount creditable.
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The amount of the employment-related expenses
incurred during any taxable year which may be taken into account under
subsection (a) shall not exceed:

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(1)
�
$10,000 if there is one qualifying
individual with respect to the taxpayer for such taxable year, or

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(2)
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$20,000 if there are two or more
qualifying individuals with respect to the taxpayer for such taxable year.

The amount
determined under paragraph (1) or (2) (whichever is applicable) shall be
reduced by the aggregate amount excludable from gross income under section 129
(with respect to dependent care assistance programs) of the Internal Revenue
Code for the taxable year.

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(d)
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Earned income limitation.

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(1)
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In general.
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Except as otherwise provided in this
subsection, the amount of the employment-related expenses incurred during any
taxable year which may be taken into account under subsection (a) shall not
exceed:

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(A)
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In the case of an
individual who is not married at the close of such year, such individual's
earned income for such year, or

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(B)
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In the case of an
individual who is married at the close of such year, the lesser of such
individual's earned income or the earned income of the individual's spouse for
such year.

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(2)
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Special rule for
spouse who is a student or incapable of caring for oneself.
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In the case of a spouse who is a student or a
qualified individual described in subsection (b)(1)(C), for purposes of
paragraph (1), such spouse shall be deemed for each month during which such
spouse is a full-time student at an educational institution, or is such a
qualifying individual, to be gainfully employed and to have earned income of
not less than:

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(A)
�
$200 if subsection
(c)(1) applies for the taxable year, or

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(B)
�
$400 if subsection
(c)(2) applies for the taxable year.

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In the case of any husband and
wife, this paragraph shall apply with respect to only one spouse for any one
month.

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(e)
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Special rules.
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For purposes of
this section:

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(1)
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Maintaining
household.
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An individual shall be
treated as maintaining a household for any period only if over half the cost of
maintaining the household for the period is furnished by the individual (or, if
the individual is married during the period, is furnished by the individual and
the individual's spouse).

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(2)
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Married couples
must file joint return.
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If the taxpayer
is married at the close of the taxable year, the credit shall be allowed under
subsection (a) only if the taxpayer and the taxpayer's spouse file a joint
return for the taxable year.

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(3)
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Marital
status.
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An individual legally separated
from the individual's spouse under a decree of divorce or of separate
maintenance shall not be considered as married.

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(4)
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Certain married
individuals living apart.
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If:

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(A)
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An individual who
is married and who files a separate return:

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(i)
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Maintains as the
individual's home a household that constitutes for more than one-half of the
taxable year the principal place of abode of a qualifying individual, and

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(ii)
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Furnishes over
half of the cost of maintaining the household during the taxable year, and

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(B)
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During the last
six months of the taxable year the individual's spouse is not a member of the
household,

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the individual shall not be
considered as married.

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(5)
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Special dependency
test in case of divorced parents, etc.
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If:

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(A)
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Paragraph (2) or
(4) of section 152(e) of the Internal Revenue Code of 1986, as amended, applies
to any child with respect to any calendar year, and

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(B)
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The child is under
age thirteen or is physically or mentally incompetent of caring for the child's
self,

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in the case of any taxable year
beginning in the calendar year, the child shall be treated as a qualifying
individual described in subsection (b)(1)(A) or (B) (whichever is appropriate)
with respect to the custodial parent (within the meaning of section 152(e)(1)
of the Internal Revenue Code of 1986, as amended), and shall not be treated as
a qualifying individual with respect to the noncustodial parent.

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(6)
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Payments to
related individuals.
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No credit shall be
allowed under subsection (a) for any amount paid by the taxpayer to an
individual:

���������
(A)
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With respect to
whom, for the taxable year, a deduction under section 151(c) of the Internal
Revenue Code of 1986, as amended (relating to deduction for personal exemptions
for dependents) is allowable either to the taxpayer or the taxpayer's spouse,
or

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(B)
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Who is a child of
the taxpayer (within the meaning of section 151(c)(3) of the Internal Revenue
Code of 1986, as amended) who has not attained the age of nineteen at the close
of the taxable year.

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For purposes of this paragraph,
the term "taxable year" means the taxable year of the taxpayer in
which the service is performed.

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(7)
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Student.
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The term "student" means an
individual who, during each of five calendar months during the taxable year, is
a full-time student at an educational organization.

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(8)
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Educational
organization.
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The term "educational
organization" means a school operated by the department of education under
chapter 302A, an educational organization described in section 170(b)(1)(A)(ii)
of the Internal Revenue Code of 1986, as amended, or a university, college, or
community college.

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(9)
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Identifying
information required with respect to service provider.
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No credit shall be allowed under subsection
(a) for any amount paid to any person unless:

���������
(A)
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The name, address,
taxpayer identification number, and general excise tax license number of the
person are included on the return claiming the credit,

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(B)
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If the person is
located outside the State, the name, address, and taxpayer identification
number, if any, of the person and a statement indicating that the service
provider is located outside the State and that the general excise tax license
and, if applicable, the taxpayer identification numbers are not required, or

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(C)
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If the person is
an organization described in section 501(c)(3) of the Internal Revenue Code and
exempt from tax under section 501(a) of the Internal Revenue Code, the name and
address of the person are included on the return claiming the credit.

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In the case of a failure to
provide the information required under the preceding sentence, the preceding
sentence shall not apply if it is shown that the taxpayer exercised due
diligence in attempting to provide the information so required.

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(f)
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No credit shall be allowed under this section
for any taxable year in the disallowance period.
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For purposes of this subsection, the
disallowance period is:

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(1)
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The period of
ten taxable years after the most recent taxable year for which there was a
final administrative or judicial decision that the taxpayer's claim for credit
under this section was due to fraud; and

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(2)
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The period of
two taxable years after the most recent taxable year for which there was a
final administrative or judicial decision disallowing the taxpayer's claim for
credit.

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[
(f)
]
(g)
�
Rules.
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The director of taxation shall prescribe such rules under chapter 91 as
may be necessary to carry out the purposes of this section."

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SECTION
4.
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Statutory material to be repealed is
bracketed and stricken.
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New statutory
material is underscored.

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SECTION 5.
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This Act, upon its approval, shall apply to
taxable years beginning after December 31, 2024; provided that on June 30, 2030,
this Act shall be repealed and section 235-55.6, Hawaii Revised Statutes, shall
be reenacted in the form in which it read on the day prior to the effective
date of this Act.

INTRODUCED BY:

_____________________________

Report Title:

Taxation;
Household and Dependent Care Services; Tax Credit; Employment-Related Expenses

Description:

Increases a taxpayer's applicable percentage of
employment-related expenses that may be claimed for the household and dependent
care services tax credit for five years.
�

Repeals 6/30/2030.

The summary description
of legislation appearing on this page is for informational purposes only and is
not legislation or evidence of legislative intent.