Hawaii Subtractions From Federal AGI

Pensions

Hawaii does not tax qualifying distributions from an employer-funded pension plan. If you received qualifying distributions from an employer-funded profit sharing, defined contribution, or defined benefit plan, or from a government retirement system (e.g., federal civil service, military pension, state or county retirement system), enter the qualifying amount here.

Nontaxable Distributions

The following lines describe what qualifying distributions are. These qualifying distributions were included in your federal AGI and will be excluded on this line. For a distribution to qualify, it must be paid by a pension plan by reason of retirement, disability, or death. The pension plan does not have to be a “qualified plan” as defined in IRC section 401.

Employer-Funded Pension Plans

The following three types of distributions are not taxed by Hawaii and should be included on line 13: (1) Pension or annuity distributions from a public (i.e., government) retirement system (e.g., federal civil service annuity, military pension, state or county retirement system), unless voluntary contributions were made by an employee under an elective right. For more information, see section 18-235-7-02, HAR. (2) Distributions from a private employer pension plan received upon retirement (including early retirement and disability retirement) if the employee did not contribute to the pension plan. (3) Distributions from a pension plan at age 70-1/2 that are made to comply with the federal mandatory payout rule do qualify as a retirement payment whether or not the employee is still working full time. Distributions from a private employer pension plan received upon retirement are partially taxed by Hawaii if the employee contributed to the pension plan.

Rollover IRAs

A rollover IRA is treated as a continuation of the original plan that provided the money that is rolled over. If distributions from the original plan would be characterized as a qualified distribution, distributions out of the rollover IRA need not be reported as well. Example - An individual received a lump sum distribution from an employer-funded profit-sharing plan upon retirement. The individual did not contribute to the profitsharing plan. The entire lump sum distribution was rolled over to an IRA. In 2019, the individual rolled over $50,000 from the IRA to a Roth IRA. The entire amount rolled over to the Roth IRA represents the lump sum distribution received by the individual upon retirement and earnings thereon. Since the lump sum distribution that the individual received upon retirement qualifies as a pension, the amount rolled over from the regular IRA to the Roth IRA also qualifies as a pension. Therefore, the amount rolled over to the Roth IRA is exempt from Hawaii’s income tax.

Taxable Pensions and Annuities

Early Distributions

Early distributions from a pension plan that are subject to the 10% federal penalty tax do not qualify and are taxable.

Deferred Compensation Plans

Distributions from a deferred compensation plan may be partly or fully taxable. A deferred compensation plan includes any plan in which the employee has a choice of whether to contribute money into the plan or take that amount in cash or property. Examples include 401(k) plans, salary reduction Simplified Employee Pension (SARSEP) plans, the Federal Thrift Savings Plan, and section 457 plans like the State of Hawaii Deferred Compensation Plan.

Annuity Plans

Retirement vehicles that you fund yourself, such as annuity plans and Individual Retirement Accounts (IRAs) that are not funded through a Simplified Employee Pension (SEP) plan, are considered to be your own investments. Distributions from these plans may be fully or partly taxable, depending on whether your IRAs include deductible or nondeductible contributions. See federal Publications 590-A and 590-B, and federal Form 8606, for more details.

Rollover IRAs

A rollover IRA is treated as a continuation of the original plan that provided the money that is rolled over. If distributions from the original plan would be characterized as taxable, distributions out of the rollover IRA would be taxable as well. Example - An individual received a lump sum distribution from an employer-funded profit-sharing plan upon separation from service before retirement. The individual did not contribute to the profit-sharing plan. The entire lump sum distribution was rolled over to an IRA. In 2019, the individual rolled over $50,000 from the IRA to a Roth IRA. The entire amount rolled over to the Roth IRA represents the lump sum distribution received by the individual upon separation from service and earnings thereon. Since the lump sum distribution that the individual received upon separation from service does not qualify as a pension (the distribution is not paid upon retirement, disability, or death), the amount rolled over from the regular IRA to the Roth IRA also does not qualify as a pension. Therefore, the amount rolled over to the Roth IRA is taxable for Hawaii’s income tax.

Hybrid Plans

If you received a distribution from a plan that is partly pension and partly deferred compensation, such as a 401(k) plan with a profit sharing component or an employer matching program, a SEP plan with employer contributions as well as a salary reduction option, or a similar hybrid plan, attach Schedule J to figure the taxable amount.

Lump-Sum Distributions

If you received a lump-sum distribution from a pension plan and you are electing to use the special ten-year averaging method, attach Schedule J and Form N-152, Tax on Lump-Sum Distributions, to figure the taxable amount. Note: If your lump-sum distribution included capital gain amounts, you may be able to reduce your tax by including the capital gain amounts on Form N-152 and electing the capital gains treatment. See Form N-152 Instructions for more information. To compute the taxable portion of your annuity or penFor more information on the taxation of pensions, see sections 18-235-7-02 to 18-235-703, HAR, Tax Information Release No. 90-4, “Taxability of Benefit Payments from Pension Plan to Participants who Attain Age 70-1/2 as Required by the Internal Revenue Code (IRC) Section 401(a)(9)(C),” and Tax Information Release No. 96-5, “Taxation of Pensions Under the Hawaii Net Income Tax Law: Deferred Compensation Arrangements; Rollover IRAs; Sub-Accounts of Pension Plans; Social Security and Railroad Retirement Act Benefits; Limitation on Deductions for Contributions to a Nonqualified Plan.”sion, use Schedule J. Caution: Certain transactions, such as loans against your interest in a qualified plan, may be treated as taxable distributions.  

Social Security Benefits

Hawaii does not tax Social Security or first tier Railroad Retirement Act benefits. Enter the amount from federal Form 1040 or Form 1040-SR, line 5b

 Military Reserve or Hawaii National Guard Duty Pay Exclusion

Hawaii does not tax the first $6,735 received by each member of the reserve components of the army, navy, air force, marine corps, coast guard of the United States of America, and the Hawaii national guard, as compensation for performance of duty as such. If you qualify, enter the smaller of: • $6,735, or • Your pay, as shown on Box 16 of the Form W-2 sent to you by your reserve component. If you are married filing a joint return, and you and your spouse qualify, add the exclusions for both of you and enter the total on line 15

Payments to an Individual Housing Account

You may be able to deduct from your gross income up to $5,000 paid in cash during the taxable year into a trust account which is established for saving for a down payment on your first principal residence. A deduction not to exceed $10,000 shall be allowed for a married couple filing a joint return. No deduction shall be allowed on any amounts distributed less than 365 days from the date on which a contribution is made to the account. Any deduction claimed for a previous taxable year for amounts distributed less than 365 days from the date on which a contribution was made shall be disallowed and the amount deducted shall be included in the previous taxable year’s gross income and the tax reassessed. The account is to encourage first-time home buyers to save money for a down payment on a home.

Exceptional Trees Deduction

You may deduct up to $3,000 per exceptional tree for qualified expenditures you made during the taxable year to maintain the tree on your private property. The tree must be designated as an exceptional tree by the local county arborist advisory committee under chapter 58, Hawaii Revised Statutes (HRS). Qualified expenditures are those expenses you incurred to maintain the exceptional tree (excluding interest) that are deemed “reasonably necessary” by a certified arborist. No deduction is allowed in more than one taxable year out of every three consecutive taxable years.

Other Hawaii Subtractions From Federal AGI This line is used to report other items that are taxed by the federal government but are not taxed by Hawaii, such as:

• Interest on federal obligations, including U.S. Savings Bonds. • Differences in the taxable portion of the Hawaii tax refund.

• Interest earned on an Individual Housing Account. • Compensation earned by patients with Hansen’s disease.

• Expenses not allowed on your federal return because they were connected with federal credits.

• Unearned income of children that you included in your federal return, if the children are filing Hawaii returns. • Benefits from or premiums paid to legal services plans.  

• Differences in the deduction for student loan interest. • Differences in the taxable portion of employer-provided adoption benefits.

• Certain income from a qualified high technology business. • Contributions to and interest earned by an individual development account.

• Moving expenses. • Qualified bicycle commuting reimbursement. • Undistributed income earned by certain foreign corporations. • Other adjustments.