[MaxGhenis]

Summary

From 2022 Hawaii applies 26 U.S.C. 1341 on its own. For an eligible repayment over $3,000, Hawaii tax equals the lesser of the tax with a deduction for the repayment and the tax without it less the decrease in prior-year Hawaii tax. Hawaii pays that decrease as a refundable credit. Before 2022, and for repayments of $3,000 or less, a repayment counts as a miscellaneous itemized deduction above 2% of Hawaii AGI while Hawaii allows those (through 2025). PolicyEngine had none of this, so a repayment changed nothing in Hawaii. This PR adds it.

• Inputs: hi_claim_of_right_prior_year_tax_decrease (tax unit; Form N-364 lines 4–6) and hi_claim_of_right_repayment_excluded_from_income (person; income Hawaii didn't tax when received).
• hi_claim_of_right_repayment, hi_claim_of_right_section_1341_eligible, and hi_claim_of_right_credit_applies, which compares final Hawaii income tax in two override branches (hi_income_tax_if_claiming_claim_of_right_credit, ..._deduction), as the federal rule does and as the model already does for Virginia's and Delaware's EITC.
• hi_claim_of_right_deduction joins Hawaii's itemized sources, and hi_claim_of_right_credit joins Hawaii's refundable credits from 2022.
• Parameters: gov.states.hi.tax.income.claim_of_right.section_1341_operative (from 2022) and gov.states.hi.tax.income.deductions.itemized.miscellaneous_deductions_allowed (through 2025).

The law

• Act 56, SLH 2023, section 2, makes section 1341 the exception to Hawaii's exclusion of Subchapter Q in HRS 235-2.3(b)(40). Section 7(1) (PDF p. 5) applies that amendment to taxable years beginning after December 31, 2021. Act 35, SLH 2026 (HB2329 CD1) keeps the exception, renumbered (b)(45).
• Form N-364 (2025) compares the tax using the repayment deduction with the tax using the prior-year decrease, at Hawaii rates. Lines 4–6 compute the decrease in prior-year Hawaii tax. The instructions exclude repayments of income Hawaii never taxed. Schedule CR (2025) lists the credit on line 9 of Part I, Refundable Tax Credits.
• HRS 235-2.4(b), before 2026, makes section 67 operative while declining to adopt the section 67(g) suspension. Act 35 deletes that exception for taxable years beginning after December 31, 2025 (PDF pp. 17–18, 34), and DOTAX Announcement 2026-06 confirms Hawaii's conformity to section 67(h)'s disallowance of miscellaneous itemized deductions.
• Worksheet A-6 (2025 N-11 instructions) applies the 2% floor to Hawaii AGI, with a floor of zero when AGI falls to zero or below.
• Before 2022, the N-11 instructions subject claim of right repayments over $3,000 to the 2% limitation (2018; 2021).

How the model reads the sources

The 2% floor, 2022–2025

The model follows the statute. Section 67(b)(9), operative through HRS 235-2.4(b), keeps the section 1341 deduction over $3,000 outside the 2% floor, and the smaller repayment stays in the floored pool. The 2022 and 2025 N-11 lists put the over-$3,000 deduction under expenses subject to the floor and the $3,000-or-less deduction outside it, the reverse of the federal categories.

Two source points suggest the N-11 categories transposed the federal ones. HRS 235-2.5(a) makes a reference from an operative federal provision to an inoperative one inoperative too, so section 67(b)(9)'s reference to section 1341 couldn't exempt the larger repayment before section 1341 became operative. Act 56 removes that reason from 2022. And the 2017 federal Schedule A instructions put repayments of $3,000 or less on line 23 within the floor and larger repayments on line 28 outside it. Both Hawaii entries point to the repayment discussion in 2017 Publication 525, which sends wage repayments back to Schedule A and its instructions.

From 2026, Act 35 disallows miscellaneous deductions, so the $3,000-or-less repayment gets nothing, and the over-$3,000 deduction continues outside that class.

N-364 line 2's AGI add-back

N-364 directs a filer who took the federal deduction to add the repayment to Hawaii AGI, reasoning that the deduction entered federal taxable income. But N-11 line 7 starts from federal AGI, and a Schedule A deduction doesn't reduce that amount. PolicyEngine's Hawaii itemized list also leaves out the federal claim of right deduction. For the itemized repayments this model covers, an AGI add-back would add income no one subtracted, so the model keeps the Hawaii deduction at zero under section 1341(a)(5) and adds nothing to AGI. An add-back could matter for a repayment deducted in arriving at AGI, but claim_of_right_repayment excludes those.

Credit ordering with the existing EITC rule

HRS 235-91.5 requires filers to use refundable credits before nonrefundable credits. The 2022 N-11 instructions implement this by subtracting refundable credits at line 34 and capping nonrefundable credits at the remaining adjusted tax liability. The model's Hawaii income tax follows that order, and this PR's credit enters it.

For the credits the model has, this interaction affects only 2022: the claim of right credit begins then, and Hawaii's EITC stays nonrefundable through 2022 and turns refundable from 2023. The method comparison reads final hi_income_tax, so it includes any EITC the credit displaces.

For a 2022 head of household with one child aged 5, no TANF receipt, a $10,000 repayment and a $600 prior-year Hawaii decrease:

Wages	No-repayment Hawaii tax	Hawaii tax with repayment	Relief	Chosen method
$15,000	$0.00	−$447.90	$447.90	Credit
$22,500	$0.00	$0.00	$0.00	Deduction (tie)

At $22,500, the fixed credit branch starts with $728 of tax and subtracts $710 of refundable credits: the $110 food/excise credit plus the $600 claim of right credit. That leaves $18 of adjusted tax liability, which caps the EITC at $18 and takes final tax to zero. Without the repayment, the EITC uses the full $618 remaining after the food/excise credit and again leaves zero tax. The deduction branch also ends at zero, so the strict comparison keeps the deduction.

The credit can still produce a section 1341(b)(1) refund. A 2025 single filer with $40,000 of wages, a $10,000 repayment and a $3,000 Hawaii decrease has $1,570.21 of tax before this credit and no other Hawaii credit. The credit wins, and hi_income_tax comes to −$1,429.79.

Design notes

• Hawaii decides its own method. The comparison uses Hawaii tax at Hawaii rates, independent of the federal method. Ties go to the deduction, as 26 CFR 1.1341-1(b)(3) provides federally. The comparison runs only when some return qualifies.
• Hawaii tests the federal threshold against the income it taxed. The model reads the federal $3,000 parameter and tests the head's and spouse's repayments of income Hawaii taxed. The prior-year Hawaii decrease takes a leaf input, as the federal decrease does.
• The 2% floor applies to the repayment alone. The model's Hawaii itemized list omits its other miscellaneous expenses, including total_misc_deductions (unreimbursed employee expenses and tax preparation fees). Hawaii's existing itemized limitation (hi_reduced_itemized_deductions) reduces the repayment deduction as it does other nonexempt itemized deductions.

Illinois and Ohio (#10195), Indiana, Massachusetts and West Virginia (#10196), New Jersey (#10198) and Arkansas (#10203) use the same federal input in their own PRs.

Not modeled:

• Combining the floored repayment with those other miscellaneous expenses in one Worksheet A-6 pool.
• Repayments deducted in arriving at AGI, such as repaid business income. claim_of_right_repayment excludes them.

Household examples (2025, single, age 40)

Household	No repayment	With the repayment
Wages $60,000, repays $10,000; Hawaii decrease $1,500	$3,029.86	$1,529.86, Hawaii credit $1,500
Wages $100,000, charity $20,000, repays $10,000; Hawaii decrease $100	$4,884.26	$4,124.26, Hawaii deduction $10,000 at 7.6%

Tests

Under gov/states/hi/tax/income/claim_of_right/:

• hi_claim_of_right_credit_applies.yaml (4 cases) and hi_claim_of_right_deduction.yaml (6 cases) cover each fixed Hawaii method, the $3,000 threshold, the 2% floor, 2021 before section 1341 became operative, and 2026 after miscellaneous deductions end. They also cover income Hawaii never taxed, a joint return counting both spouses, each chosen method and another state. The two chosen-method cases also assert hi_income_tax: $1,529.86 and $4,124.26.
• hi_income_tax.yaml (5 cases) pins the 2022 credit ordering above, the $22,500 no-repayment baseline and deduction tie, the fixed-credit branch's displaced EITC, and the 2025 refund.

tests/unit/test_hi_claim_of_right_properties.py runs 11 tests over a 108-return grid for each of 2021, 2025 and 2026 (repayment × Hawaii decrease × wages × charity). It needs Python because its checks compare independent branch simulations.

Invariants

1. Lesser of. Hawaii income tax equals the smaller of the tax with the deduction method fixed and the tax with the credit method fixed, ties going to the deduction. Each branch equals a simulation that fixes the method as an input.
2. Exclusive. When section 1341 applies, the deduction equals the whole repayment or nothing and the credit equals the whole decrease or nothing, never both. Before 2022 no return gets the credit.
3. Independence and monotonicity. Hawaii tax ignores the federal method, never rises with a repayment, and never rises as the repayment or the prior-year decrease grows.

Letting ties go to the credit, putting a 2% floor on the section 1341 deduction, leaving the credit out of the refundable list, or making section 1341 operative from 2021 each fails the property suite.

test_claim_of_right_section_1341_properties.py now holds an explicit, sourced map of the states whose own relief applies under the federal credit method. Each listed state whose variable exists must lower the household's tax by more than $1, and every other state stays unchanged, apart from the three that deduct federal tax. #10195, #10196, #10198 and #10203 carry the identical file, so they merge in any order.

Cost

At an earlier head, CI run 38545546945 took about 10 s for the property file (3.76 s of fixture setup and 6.30 s of teardown). The Rest shard-1 remaining group took 14:30 wall time with a 7.82 GB peak on a 16 GB runner. The fixture makes 15 simulations of 108 returns and frees them at teardown.

Microsimulation impact

We estimate no change in 2025. No record in the default dataset carries claim_of_right_repayment, and the Hawaii deduction and credit need a repayment, so no record changes in hi_income_tax, state_income_tax, income_tax or household_net_income.

Axiom

axiom: TheAxiomFoundation/rulespec-us#1796 queued

rulespec-us still pins Hawaii's conformity at December 31, 2024 and defers itemized deductions (us-hi/policies/income_tax/resident_core_liability_pipeline.yaml). The pinned corpus contains the section 1341 exception.

impact: none in 2025; no record in the default dataset carries claim_of_right_repayment

🤖 Generated with Claude Code

[MaxGhenis]

Hand-off to the US + core hub (Hawaii; state claim of right lane, session local_d0c92ac9).

• Head: 0aa72e4b46. MERGEABLE. The PR's own changes are unchanged since the approving review; later commits only merge Model the claim of right repayment deduction and credit (26 U.S.C. 1341) and North Carolina's rules that depend on it #10038's heads 2d36a76bca (its merge of main) and 32b0c13a6a (Montana list).
• Review: delta review r4 (Opus 5.5) APPROVE; r2 (GPT-6.1 Sol) APPROVE (~/reviews/us-hub/claim-of-right-states/reviews/out-delta-r4.md, out-10200-r2.md).
• Passed locally at the current or reviewed head: the PR's YAML files, its property tests where it has them, and the cross-state test test_claim_of_right_section_1341_properties.py (33 tests, including 2026); details in ~/reviews/us-hub/claim-of-right-states/evidence/tests.md.
• Microsimulation: done (2025 default dataset); no record changes, and every new variable is $0 because claim_of_right_repayment is $0 on every record (~/reviews/us-hub/claim-of-right-states/impact/compare.*.2025.json).
• Pending: CI on this head.
• Depends on: Model the claim of right repayment deduction and credit (26 U.S.C. 1341) and North Carolina's rules that depend on it #10038 (federal section 1341), which must merge first; this branch carries its commits. After Model the claim of right repayment deduction and credit (26 U.S.C. 1341) and North Carolina's rules that depend on it #10038 squash-merges, merge upstream/main into this branch before landing.
• Hold for Max's ruling d1461 (2022-2025 statute vs N-11/N-364 instructions; the credit-ordering part is Apply Hawaii refundable credits before nonrefundable credits #10202).
• Axiom: the rulespec-us pe-parity draft is held for Max's go (d1459), with the hub's d1142 standing go as the alternative.
• Follow-ups owed: none from this PR. Kentucky is decision d1465; Pennsylvania needs no change.

[codecov]

Codecov Report

✅ All modified and coverable lines are covered by tests.
✅ Project coverage is 100.00%. Comparing base (aae7f98) to head (f7acfc2).
⚠️ Report is 73 commits behind head on main.

Additional details and impacted files

@@            Coverage Diff            @@
##              main    #10200   +/-   ##
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  Coverage   100.00%   100.00%           
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  Files            1         9    +8     
  Lines           37       128   +91     
  Branches         0         2    +2     
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+ Hits            37       128   +91     

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[MaxGhenis]

Merging at f7acfc2ec7 as an admin squash with --match-head-commit, past the required-review gate.

• Checks: gh pr checks passes all 38 checks at this head, including pull request run 42582298142 (36 of 36 jobs). GitHub reports the PR MERGEABLE, and no change request stands: we dismissed DTrim99's review 5524743838 on 2026-11-09 with a mapping of each point to its fix.
• An independent review approved the code at 924f7b79ef, after the merges of Model the claim of right repayment deduction and credit (26 U.S.C. 1341) and North Carolina's rules that depend on it #10038 and main.
• An independent delta review approved f7acfc2ec7. The commits after 924f7b79ef change documentation in hi_claim_of_right_deduction.py and source_conflicts/candidates.yaml, and no formula or expected value moved.
• On a tree that composes all five claim-of-right PRs on main at fc521b4f6c, the source-conflict guard (103 of 103) and the shared section 1341 property file (58 of 58) pass. So do the three Hawaii case files (4, 6 and 5 cases) and the property file (11 of 11).
• The review ran each mutation the description lists, and each household figure in the description matches a simulation to the cent.