Hawaii taxes: What retirees should know now

In this island paradise, retirees will see several deductions and credits to help reduce the tax burden

By Abel Soares III, CPA/PFS, CFP

There are many articles dedicated to all of the reasons why Hawai’i has a rich reputation of being a true paradise, the financial logistics of retiring within this amazing island chain should be considered before you decide to retire there.

Hawaii has the third highest income tax according to The Tax Foundation.(“State Tax Burden by State, 2022,” Tax Foundation, accessed September 12, 2024, https://taxfoundation.org/data/all/state/tax-burden-by-state-2022/). This is behind only New York and Connecticut. Does this mean you will pay high taxes by residing in Hawai’i? Not necessarily. Effective tax planning can go a long way in Hawai’i as the main factor for this high rate is individual income tax rates. Other taxes are quite low in comparison.

Hawai’i taxation, from income to excise, offers some advantages for retirees

Hawai’i has a progressive income tax system with rates ranging from 1.4% to 11%, depending on your income bracket, with higher earners paying a larger percentage of their income in taxes. However, there are various deductions and credits available that can help reduce your overall tax burden. As an example, retirees are not taxed on their public or private pensions, including social security benefits. Medicare premiums may also be deductible, so long as you itemize deductions, and total medical expenses are more than 7.5% of your Hawai’i adjusted gross income. Additionally, taxpayers 65 and over receive an additional exemption.

Income taxes are where you will find one of the greatest retirement tax planning opportunities. If you are in a low-income tax state and moving to Hawaii, consider post tax contributions to your 401k and individual retirement accounts (IRAs), especially if you will have a similar federal tax rate in retirement as your working years. You can find information on the different types of Hawai’i tax forms here (https://tax.hawaii.gov/forms/).

Taxpayers who contribute to a 529 college savings account for a child or grandchild, earnings from the fund will grow tax-free if used for a qualified higher education expense, although contributions to the 529 account do not receive a state tax deduction. Hawai’i also does not conform to the federal provision that allows distributions to be used tax-free for elementary or secondary school expenses.

Whether you’re buying a surfboard or surfing lessons, you’re going to have to pay tax on it. Hawai’i does not have a sales tax, although it does have a General Excise Tax (GET) which is applied on purchases of all goods AND services. We are almost all familiar with a sales tax on goods when you buy groceries and go out to dinner, but the GET is also applied to services from a massage, tickets to an entertainment event, golf, or chartering a boat to go fishing. As an individual there is no real relief from paying GET, but at 4 to 4.5 percent, depending on the county, still compares favorably with other states the rate comes in at the 6th lowest in the country for combined state and local sales tax, according to The Tax Foundation (2024 Sales Taxes by State,” Tax Foundation, accessed September 12, 2024, https://taxfoundation.org/data/all/state/2024-sales-taxes/). 

Special benefits for military retirees

There are many specific tax exemptions for military retirees. For military veterans with 100% military disability, regardless of age and retirement status, there are additional benefits. These individuals are exempt from paying property taxes on their primary residence. Additionally, they may qualify for other state benefits, such as reduced fees for vehicle registration and access to state and national parks.

Property Taxes

With a median price for a home at $850,000 and $600,000 for a condo, housing is among the most expensive in the nation, moving to Hawai’i to retire will take some advance planning. But while housing costs are high, property taxes in Hawai’i are relatively low compared to other states. The average effective property tax rate can be as low as 0.35%, which is one of the lowest in the nation. This can be particularly beneficial for retirees who own their homes. Additionally, there are exemptions or reductions provided at the county level available for homes occupied by the primary owners, seniors, disabled veterans, and more. Here is a link to many of the property exemptions for Honolulu County (https://realproperty.honolulu.gov/tax-relief-and-forms/exemptions/). The most common exemption offers homeowners residing in their primary residence a tax exemption on $120,000 of property value. For retirees over 65 this exemption increases to $160,000 for 2024.

In summary, while Hawai’i does have a high rate at the top end of their marginal income tax schedule, other taxes such as the GET and property taxes are relatively low. If you consult with your financial advisor and have an effective financial plan you may be able to curb Hawai’i’s higher cost of living with a mitigated tax bill by taking advantage of available exemptions and deductions.  You can find a licensed professional here. To find a licensed professional in Hawai’i, click here.

About the author

Abel Soares III, CPA/PFS, CFP, is the CEO of Hui Malama Advisors LLC on Oahu in Hawai’i. He is also a member of the American Institute of CPA’s (AICPA)’s PFP Champions task force.