Hawaii taxpayers could benefit from new IRS Direct File system

by Jonathan Helton, Grassroot Institute and Nicole Woo, Hawai‘i Children’s Action Network

Tax season is just around the corner, and there’s a good chance that many of the people reading this will be paying someone else to help file their taxes online.

Those fees add up — but they shouldn’t have to.

The Internal Revenue Service piloted a tax prep tool last year in 12 states called Direct File, which allows taxpayers to avoid the fees charged by tax prep software or agencies and file their taxes online directly with the IRS for free.

Last year, more than 140,000 households opted to use the system, with 90% giving it an “excellent” or “above average” rating.

For the 2025 tax season, Direct File will be available in 24 states — but Hawaiʻi won’t be one of them.

However, it could join in time for the 2026 season, and there are a number of reasons it should.

For starters, using the Direct File system saves taxpayer time and money. A review from the Economic Security Project estimates that if just one-third of eligible Hawaiʻi taxpayers used the tool, the savings could total $34.6 million in filing fees and almost a million hours in filing time.

Direct File could also help Hawaiʻi residents claim tax credits.
For example, both the federal government and Hawaiʻi offer an earned-income tax credit, which provides a rebate to low- and middle-income households, primarily those with children. Hawaiʻi’s EITC, which is tied to taxpayers receiving the federal credit, provides 40% of the value of the federal credit, up from 20% thanks to a 2023 state law.

But a lot of Hawaiʻi taxpayers who qualify don’t claim that credit.

The state Department of Taxation reported that 82,116 taxpayers claimed the EITC in 2023, but the IRS estimated that between 2014 and 2021, an average of 20% of those eligible didn’t claim it, which suggests that close to 20,000 Hawaiʻi individuals and families left their hard-earned money on the table.

It’s a similar story for the state’s food excise tax credit.

Dylan Moore of the Economic Research Organization at the University of Hawai‘i and Baybars Karacaovali of the Department of Taxation estimated in April 2024 that a third of Hawaiʻi residents eligible for the credit did not receive it, missing out on more than $15 million.

The Economic Security Project report put the likely gain from more people claiming federal credits at $35.5 million for Hawaiʻi.

And that’s just for the federal credits. Hawaiʻi’s adoption of Direct File could improve the results for state-level credits as well.

Direct File could also help Hawaiʻi residents claim tax credits.

For folks barely getting by, greater access to these credits could be a lifeline to help them afford to stay in Hawaiʻi.

A recent report from Aloha United Way noted that a third of individuals who fall under the “asset limited, income constrained, employed” income threshold are considering leaving. Last year, a survey from the Holomua Collective revealed similar attitudes.

And what would adopting Direct File cost the state? Not much.

A bit of startup cost might be involved, but the state Department of Taxation already uses the same software vendor as other states that have partnered with the IRS to deploy Direct File. But otherwise, Hawaiʻi could easily join the other states in offering the Direct File option by 2026.

A caveat is that there has been some debate at the federal level about whether the Direct File program should continue. But assuming it does under the new administration, Hawaiʻi joining it would be a smart move.

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Jonathan Helton is a policy researcher with the Grassroot Institute of Hawaii. Nicole Woo is director of research and economic policy at the Hawai‘i Children’s Action Network.