The Aloha State is known for its high cost of living, but it can be a tax paradise for retirees. It exempts Social Security benefits as well as most pension income from state income taxes. But if you have other sources of income, Hawaii will tax that income up at rates up to 11%. Seniors can also get big-dollar exemptions from property taxes (these vary by county), but keep in mind that Hawaiian housing values are sky-high.
State Sales Tax
4%. Hawaii employs a General Excise Tax that applies to a wide range of goods and services. Only prescription drugs and prostheses are exempt. Oahu has a county surcharge tax of 0.5% to pay for a mass transit system, making the average combined rate 4.35%, as calculated by the Tax Foundation. Complicating matters further, the tax is calculated on the vendor rather than the buyer, which means consumers pay a few percentage points more in practice.
Income Tax Range
Low: 1.4% (on taxable income up to $4,800 for married couples filing jointly; on up to $2,400 for married couples filing separately and individual filers)
High: 11% (on taxable income over $200,000 for married couples filing jointly and surviving spouses; on over $400,000 for married couples filing separately and individual filers)
Exemptions for Other Retirement Income
First-tier Railroad Retirement benefits and military, federal, state and local pensions are exempt. All out-of-state government pensions are exempt. Also, private employer-funded pension plans that employees did not contribute to are exempt. Distributions from private, employer-funded pension plans received upon retirement are partially taxed by the state if the employee contributed to the pension plan. Employee earnings are taxed under these plans, but employee contributions are exempt.
IRA distributions are generally treated the same as for federal tax purposes. An additional state deduction may be available for certain IRA distributions from an employer-funded pension plan.
401(k)s and Other Defined-Contribution Employer Retirement Plans
Distributions are generally treated the same as for federal tax purposes. However, if the employer provided matching contributions, a state deduction may be available for the employer-funded portion of the distribution.
Private employer-funded pension plans that employees did not contribute to are exempt.
First-tier Railroad Retirement benefits and military, federal, state and local pensions are exempt. All out-of-state government pensions are exempt.
The median property tax on Hawaii’s median home value of $538,400 is $1,459.
Tax breaks for seniors: These vary by county. In Honolulu, for example, homeowners 65 or older get a larger home exemption of $120,000. Low-income seniors age 75 and older may qualify for even larger exemption amounts, ranging from $140,000 to $200,000, depending on age.
State excise tax is due on vehicle sales. Vehicles are also taxed by weight at registration. (Example: A 4,000-pound vehicle registered in Honolulu County would owe $200 to the county and $75 to the state.)
Inheritance and Estate Taxes
Hawaii decided not to follow the big jump in the estate-tax exemption under the new federal tax law and set its own instead: $5.49 million, the same as for 2017. Tax rates range from 10% to 15.7%.