Overview of Hawaii Retirement Tax Friendliness
Hawaii exempts some types of retirement income, including Social Security retirement benefits and income from public and private pensions. However, the state has high income tax rates and also has its own estate tax.
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Hawaii Retirement Taxes
There are a couple of things you should keep in mind if you’re considering a retirement in Hawaii. The first is the cost of living, which in Hawaii is well above than the national average.
The second item to pay attention to is the tax system. Depending on how you plan to live during retirement, you may find Hawaii’s tax system quite reasonable or quite onerous. That’s because the state entirely exempts some types of retirement income, including Social Security and pension income, while fully taxing income from retirement savings accounts.
Likewise, although the state’s property tax rate is the lowest in the U.S., housing costs remain quite high because property in the Aloha State is so expensive.
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Is Hawaii tax-friendly for retirees?
Hawaii is moderately tax-friendly, but it really depends on each retiree’s personal financial situation. For a person living off of Social Security and pension income, with small contributions from an IRA or another retirement account, Hawaii can be very tax-friendly.
For someone relying entirely on a 401(k) or IRA for their retirement income, Hawaii will be rather unfriendly because that income would be subject to some steep income tax rates.
Is Social Security taxable in Hawaii?
According to Hawaii law, Social Security income is not subject to state income taxes.
Are other forms of retirement income taxable in Hawaii?
The good news is that public and private pension income is tax-exempt in Hawaii. The bad news is that all other forms of retirement income are taxed and are not eligible for any kind of deduction. So if you plan on living off of income from a 401(k), an IRA, you should plan to pay taxes on that income.
How high are property taxes in Hawaii?
At 0.28%, the median effective property tax rate in Hawaii is the lowest in the country. But because of Hawaii’s sky-high home values, the annual property taxes paid by Hawaiians rank near the middle of the pack across the 50 states and Washington D.C. The median annual property tax in Hawaii is $1,893.
What is the Hawaii home exemption?
Hawaii’s home exemption is available to Hawaii residents who own and occupy their home. The exemption is subtracted from the assessed value when calculating taxes.
The amount of the exemption varies by county. In Honolulu County, the basic exemption is $120,000. Seniors age 65 and older qualify for a larger exemption of $160,000.
How high are sales taxes in Hawaii?
Sales taxes in Hawaii are relatively low. In fact, the state technically doesn’t have a sales tax. Hawaii has a General Excise Tax (GET) which is paid by businesses and passed indirectly to consumers.
The statewide GET is equivalent to a 4% sales tax. Honolulu County collects an extra 0.50% tax, so the total GET there is 4.50%. This is still lower than the average sales tax in the rest of the country. Seniors will save on prescription drugs, however, as these are not taxed. Food is taxable, though.
What other Hawaii taxes should I be concerned about?
Seniors in Hawaii who have assets worth more $5.49 million should be aware of the state’s estate tax. Estates with a taxable value below that amount will not be taxed. Those above that limit, however, can expect to pay rates up to 20%.
Most Tax Friendly Places for Retirees
SmartAsset’s interactive map highlights the places in the country with tax policies that are most favorable to retirees. Zoom between states and the national map to see the most tax-friendly places in each area of the country.
Methodology Our study aims to find the areas with the most tax-friendly policies for retirees. To do that we looked at how the tax policies of each city would impact a retiree with a $50,000 income. Our hypothetical retiree is getting $15,000 from Social Security benefits, $10,000 from a private pension, $15,000 from retirement savings like a 401(k) or IRA and $10,000 in wages.
To calculate the expected income tax this person would pay in each location we applied deductions and exemptions. This included the standard deduction, personal exemption and deductions for each specific type of retirement income. We then calculated how much this person would pay in income tax at the federal, state, county and local levels.
We calculated the effective property tax rate by dividing median property tax paid by median home value for each city.
In order to determine sales tax burden we estimated that 35% of take-home (after-tax) pay is spent on taxable goods. We multiplied the average sales tax rate for a city by the household income less income tax. This product is then multiplied by 35% to estimate the sales tax paid.
For fuel taxes, we first distributed statewide vehicle miles traveled down to the city level using the number of vehicles in each county. We then calculated miles driven per capita in each city. Using the nationwide average fuel economy, we calculated the average gallons of gas used per capita in each city and multiplied that by the fuel tax.
For each city we determined whether or not Social Security income was taxable.
Finally, we created an overall index weighted to best capture the taxes that most affect retirees. We gave a 4x weighting to income tax, 3x weighting to property tax rate, a 2x weighting to sales tax and 1x weighting to fuel tax.
Sources: Internal Revenue Service, Social Security Administration, state websites, local government websites, US Census Bureau 2014 American Community Survey, Avalara, American Petroleum Institute, GasBuddy, UMTRI, Federal Highway Administration
