Introduction: Expat Tax Hawaii Planning for British Families in Honolulu
The expat tax Hawaii position is the most misunderstood of any American state, because the headline rate hides three reliefs that matter enormously to British families. Hawaii charges up to 11% on income in 2026, and a new law lifts the top rate to 13% from 2027. However, the same state caps tax on long-term capital gains at 7.25%, exempts pensions funded by an employer, and gives a credit for UK tax that the federal return could not use. Consequently, a wealthy Briton in Honolulu can pay far less than the rate table suggests, or far more, depending on how the UK income is structured.
At TaxYork, we prepare federal, state and UK returns for British executives, hoteliers, physicians, investors, company owners and retirees across Honolulu, Kāhala, Kailua, Maui and the Big Island. In our experience, most families arrive expecting a simple 11% charge on everything. Therefore this expat tax Hawaii guide explains what the state really taxes, what it leaves alone, and how the 2027 changes should shape your decisions now.
Expat Tax Hawaii Basics: Three Tax Layers and Three Reliefs
A British family in Hawaii deals with three income tax layers. First, federal tax reaches worldwide income, relieved by the foreign tax credit on IRS Form 1116. Second, HMRC keeps taxing UK rent and UK property gains. Third, Hawaii taxes residents on their entire income, wherever it arises. Against that, three expat tax Hawaii reliefs apply: the 7.25% ceiling on net capital gains, the exclusion for employer-funded pensions, and a limited credit for foreign tax. Each one has conditions, so we work through them in turn below.
Who This Guide Is Written For
This guide addresses high-net-worth British nationals, dual national US UK families and accidental Americans who live in Hawaii, plus Hawaii-domiciled Americans working in London. Specifically, it suits senior executives, investors, business owners, medical consultants and retirees who still hold UK property, pensions, ISAs or company shares. If that describes your household, the expat tax Hawaii rules can move your annual bill by tens of thousands of dollars.
How Hawaii Compares With Our Other State Guides
Hawaii sits between the extremes in our series. Missouri now charges nothing on capital gains, while California taxes UK gains at up to 13.3% with no foreign credit. Meanwhile, Washington has no income tax but charges up to 9.9% on large gains. For the federal rules underneath every state, see our complete 2026 guide to UK expat tax in the USA.
How Hawaii Taxes High Earners in 2026 and 2027
The expat tax Hawaii rate table is changing in stages, and wealthy households sit on the wrong side of the latest change. Therefore you need both years in view.
The Expat Tax Hawaii Rate Schedule for 2026
The expat tax Hawaii schedule has twelve brackets, running from 1.4% to 11%. For 2026, a married couple filing jointly reaches the 11% rate above $650,000 of taxable income, and a single filer reaches it above $325,000. In addition, the standard deduction doubled to $16,000 for joint filers in 2026, and each personal exemption is worth $1,144. The brackets appear in the Hawaii income tax law, which the Department of Taxation publishes in full.
Act 24 of 2026: A 13% Top Rate From 2027
On 21 May 2026 the Governor signed Senate Bill 3125 as Act 24. The law keeps the scheduled tax cuts for couples with taxable income below $350,000, yet it cancels the planned bracket widening above that level. Furthermore, it adds a new 13% bracket for million-dollar earners. From 2027, the 13% rate applies above $1,000,000 for joint filers, $750,000 for heads of household and $500,000 for single filers. As a result, Hawaii's top rate will sit just below California's 13.3%, the highest in America.
What the Department's Own Figures Show
The Department of Taxation's May 2026 legislative update sets out the effect. A married couple with $1,500,000 of Hawaii adjusted gross income pays $143,169 for 2026 and $151,054 for 2027. Under the earlier law, their 2027 bill would have fallen to $137,981. Similarly, a couple with $10,000,000 of income sees the bill rise from $1,078,169 to $1,256,054. For expat tax Hawaii planning, therefore, a large bonus, share vesting or business profit is worth accelerating into 2026 where the commercial facts allow it.
The 7.25% Ceiling on Capital Gains
The expat tax Hawaii rules give net long-term capital gains an alternative rate. In short, the tax on your net capital gain cannot exceed 7.25%, however high your other income climbs. Act 24 left that ceiling untouched, so the gap between gains and ordinary income widens to 5.75 points in 2027. Bills to raise the ceiling have been introduced repeatedly, and none had become law when we wrote this guide. Federally, the gain still bears capital gains tax at up to 20% plus the 3.8% net investment income tax. Short-term gains, by contrast, receive no state ceiling.
Foreign Income: No Exclusion, but a Rare Credit for UK Tax
This is where the expat tax Hawaii rules differ most from every other state we cover. Hawaii switches off the federal international rules, and then partly replaces them with its own.
Hawaii Does Not Recognise the Foreign Earned Income Exclusion
Hawaii's statute makes the federal source and foreign income rules, known as subchapter N, inoperative for state purposes. As a result, the foreign earned income exclusion does not exist in Hawaii. The Form N-11 instructions tell residents who worked outside the United States to add back the income they excluded on federal Form 2555. For an expat tax Hawaii filer working in London, therefore, up to $132,900 of 2026 salary is free of federal tax and fully taxable in Hawaii.
The Credit for Tax Paid to a Foreign Country
Most states credit only tax paid to other US states. Hawaii's law, however, names foreign countries as well. The limit is the important part. Under section 235-55, the credit cannot cover tax that qualifies for a federal exclusion or credit. In practice, the state worksheet takes the UK tax you paid and subtracts the federal foreign tax credit allowed for the year. Only the remainder counts. Consequently, the expat tax Hawaii credit rewards families whose UK tax exceeds their federal tax on the same income.
Three Limits on the Credit
Three further limits apply to the expat tax Hawaii credit. First, the credit cannot exceed the Hawaii tax on your income from outside the state. Second, any unused balance is lost, because the worksheet states that the excess cannot be carried forward. Third, UK tax on income that Hawaii exempts, such as an employer-funded pension, does not count at all. Moreover, you cannot deduct the same UK tax as an itemised deduction and claim it as a credit. Our tax treaty optimisation service models the federal and state credits together, because a change on one return alters the other.
UK Companies and UK Funds
Federal law taxes American shareholders on some undistributed profits of foreign companies and funds. Hawaii's instructions state plainly that the state has no comparable provisions for controlled foreign corporations or passive foreign investment companies. Therefore the federal figures need adjusting on the expat tax Hawaii return, and you must keep a separate Hawaii basis record. In our reading, Hawaii generally taxes a UK company dividend or a UK fund gain when you receive it, and a long-term gain can then fall under the 7.25% ceiling. Nevertheless, the adjustment runs both ways over time, so the records matter more than the rate.
UK Pensions in Hawaii
Pensions are where the expat tax Hawaii outcome surprises British retirees most pleasantly. Hawaii is one of very few income-tax states that exempts a pension by reference to who funded it.
The Employer-Funded Pension Exclusion
Hawaii excludes compensation received as a pension for past services. The Department explains that qualifying distributions from an employer-funded pension plan are not taxed, provided they are paid by reason of retirement, disability or death. Importantly, the instructions add that the plan does not have to be a qualified plan under the US tax code. Nothing in the statute limits the relief to American schemes. Consequently, a UK final salary pension that your employer funded should qualify in the same way as a US corporate pension, although the Department has published no guidance specific to British schemes.
Contributory Schemes and the Exclusion Ratio
If you contributed to the scheme, Hawaii taxes part of each payment. The administrative rule on pension income sets an exclusion ratio: employer contributions divided by total contributions. For example, if your employer provided 80% of the funding, 80% of each payment is exempt. Where a defined benefit scheme cannot state the employer's share, the rule supplies an actuarial formula instead. Therefore we ask UK scheme administrators for a contribution history before the first Hawaii return, because the ratio then applies for life.
SIPPs and Personal Contributions
A SIPP built from your own contributions is the opposite case. The expat tax Hawaii exclusion covers employer funding only, so drawdown from personal contributions is taxable at up to 11%, and 13% from 2027 for the largest incomes. Under Article 17 of the US-UK tax treaty, a UK pension paid to a US resident is usually taxable only in the United States, and the IRS explains the federal treatment of foreign pension distributions. Furthermore, the 25% lump sum that is tax-free in Britain is taxable for a US resident, because the treaty's saving clause preserves US tax.
The UK State Pension Is Not Social Security
Hawaii does not tax US Social Security benefits. However, the exclusion follows the Social Security line of the federal return, and the UK State Pension is not reported there. The IRS treats it as fully taxable pension income. In our view, therefore, the prudent expat tax Hawaii position treats the UK State Pension as taxable, unless a documented argument supports the pension exclusion. For a wealthy household the sum is small, but the point illustrates how closely each UK income stream must be classified.
UK Property, Rent and Capital Gains
Every expat tax Hawaii review we carry out tests UK property separately, because rent and gains meet entirely different state rules.
UK Rental Income
Britain keeps the first right to tax UK rent, and HMRC sets out the rules for UK rental income when you live abroad. Federally, the UK tax is credited against US tax on the same rent. The expat tax Hawaii charge then applies to the net rent again as ordinary income. Because a high earner's federal tax on rent usually exceeds the UK tax, the federal credit absorbs all of it. As a result, nothing remains for the Hawaii credit, and the rent bears the full state rate.
Selling UK Property
A sale works differently. HMRC charges non-residents up to 24% on residential gains, and you must report within 60 days under the rules for non-residents selling UK property. The federal rate on the same gain is 20%, so UK tax often exceeds the federal credit. Consequently, the surplus can flow into the expat tax Hawaii credit and reduce the 7.25% state charge. Few states offer anything comparable, and New Jersey, Illinois and California offer nothing at all.
Why the Credit Is Smaller Than It Looks
The federal credit pools UK rent and UK gains in one passive category. Therefore spare federal tax on the rent soaks up part of the surplus UK capital gains tax before Hawaii sees any of it. In addition, the 3.8% net investment income tax cannot be offset by foreign tax credits, so it remains due in full. We compute the federal limit first, and only then the state credit, because the order decides the answer.
Selling Hawaii Property After You Leave
If you later return to Britain and sell a Hawaii home, the buyer must withhold 7.25% of the sale price under the state's rules for non-resident sellers. That withholding is a deposit against the real tax, and you recover any excess through the return or an early refund application. Moreover, a non-resident alien seller faces separate federal withholding, which we explain in our guide to FIRPTA withholding on US property sales.
Hawaii Residency and Domicile
Residency decides who pays expat tax Hawaii on worldwide income. The rules catch Britons who stay longer than planned, and they hold on to Hawaii Americans who move to London.
The Two Tests and the 200-Day Presumption
You are a Hawaii resident if you are domiciled in the state, or if you reside there for other than a temporary or transitory purpose. Furthermore, anyone present for more than 200 days in a tax year is presumed to be a resident. You can rebut the presumption only by showing a permanent home elsewhere and a temporary purpose in Hawaii. The Department's guidance on determining residence status sets out the factors it weighs.
Arrival Years and Second Homes
In your first expat tax Hawaii year you file Form N-15 as a part-year resident, and Hawaii taxes worldwide income only from the date residence begins. The Department's guide to the non-resident and part-year return explains the split. Federally, a British national usually becomes a resident alien under the substantial presence test. Importantly, a Briton who winters in a Maui home must count days carefully, because the 200-day presumption applies to second-home owners too. Therefore realise large UK gains and pension lump sums before the residence date where you can.
Hawaii Americans Working in London
Domicile is sticky. The Department's instructions give a blunt example: a Hawaii resident working in a foreign country remains a Hawaii resident unless the foreign country grants permanent resident status. For an American in London, that usually means indefinite leave to remain, which takes years. Until then, Hawaii taxes the London salary, ignores the federal exclusion, and credits only UK tax beyond the federal credit. Consequently, claiming the federal foreign tax credit, rather than the exclusion, often produces the lower combined bill for an expat tax Hawaii filer in Britain.
Case Study: The Ashworths in Kāhala
This illustrative case study shows how the expat tax Hawaii rules combine for a real-world family. The names are invented and the figures are simplified, but the pattern matches what we see every season.
The Facts
Richard Ashworth is a British hotel group executive who moved to Kāhala, Honolulu, in 2024 with his wife Helen. In 2026 Richard earns $500,000 of salary. Helen draws £36,000 from a UK defined benefit pension, of which her former employer funded 80%. The couple let a flat in Clapham, which produces net rent of $45,000 on US figures after depreciation. In addition, they sell a Kensington flat, never their main home, for a gain of £500,000. We use an illustrative rate of $1.32 to the pound, so the pension is $47,520 and the gain is $660,000.
The UK and Federal Position
HMRC charges £5,486 on the rent and about £118,664 on the gain, which is $163,878 in total. Federally, the gain bears 20%, or $132,000, and the rent bears about $15,750 at 35%. The federal credit is therefore limited to roughly $147,750, leaving $16,128 of UK tax unused. Separately, the net investment income tax adds $25,080 on the gain, with no credit available. You can model the federal element with our US capital gains tax calculator.
The Hawaii Bill
Hawaii excludes 80% of Helen's pension, so only $9,504 is taxable. The couple's ordinary taxable income is about $536,200 after the standard deduction and exemptions, which produces state tax of roughly $40,700. The gain is taxed at the 7.25% ceiling, adding $47,850. Before credits, therefore, the expat tax Hawaii charge is about $88,550. The unused UK tax of $16,128 then qualifies as a state credit, because it falls within the Hawaii tax on their out-of-state income. Their final bill is about $72,400.
What the Reliefs Saved, and What 2027 Changes
Without the capital gains ceiling, the gain would have been taxed at 11%, costing a further $23,500. The pension exclusion saved about $3,400, and the foreign credit saved $16,128. Altogether, the three reliefs cut the state bill by roughly $43,000. However, had Richard received a $700,000 bonus in 2027 instead of 2026, the slice above $1,000,000 would bear 13%. Therefore the lesson is clear: realise gains under the ceiling, document the pension ratio, and time ordinary income before the new bracket arrives.
Compliance That Comes With Hawaii Residency
Living in Hawaii adds state deadlines and a state business tax to an already heavy federal and UK load. The expat tax Hawaii calendar differs from the federal one in ways that catch newcomers.
Deadlines and Estimated Tax
Hawaii resident returns on Form N-11 are due on 20 April, five days after the federal deadline. The state also expects estimated payments once you will owe $500 or more after withholding. Specifically, you avoid a penalty by paying at least 60% of the current year's tax, or 100% of the prior year's tax. Consequently, a UK property sale or a pension lump sum without matching expat tax Hawaii estimates will attract a charge. The Hawaii Department of Taxation publishes the forms and payment options.
General Excise Tax on Consultants and Landlords
Hawaii has no sales tax. Instead, it charges general excise tax on gross business receipts, at 4% plus a 0.5% county surcharge in Honolulu. Importantly, the tax applies to self-employed consultants and landlords of Hawaii property, and it applies to gross income rather than profit. Therefore a British consultant billing from Honolulu needs a licence and periodic returns, even where no income tax is due.
FBAR, Form 8938 and Missed Returns
Hawaii has no foreign account report of its own. However, as a US tax resident you must file an FBAR through FinCEN's BSA E-Filing system if your UK accounts, including ISAs and many pensions, exceed $10,000 combined at any time in the year. Married couples living in Hawaii must also file Form 8938 once foreign assets pass $100,000 at year end or $150,000 at any time. Our FBAR and FATCA reporting service covers both. If you have missed US tax returns, a missed FBAR or missed Hawaii returns, we prepare the outstanding federal, state and UK filings together so the figures agree.
How TaxYork Can Help
TaxYork provides comprehensive US tax return preparation for expats and US UK tax returns preparation for families who live across both countries. We handle the expat tax Hawaii layer as part of one joined-up compliance process.
Joined-Up Returns
We prepare your federal return, Hawaii Form N-11 or N-15, general excise filings and UK self assessment together, using the same exchange rates and dates throughout. As a result, the federal credit, the Hawaii credit worksheet, the pension exclusion ratio and HMRC's figures reconcile. Nothing is taxed twice by accident, and no relief is left unclaimed.
Before the Sale, the Bonus or the Move
The largest savings come before a disposal, a vesting date or a change of residence. Therefore our cross-border planning and compliance team reviews UK property, pension drawdowns, fund holdings and residency dates while there is still time to change the outcome. With the 13% bracket starting in 2027, that review is worth doing this year.
Conclusion
For British families, expat tax Hawaii planning shows that the state is neither the punishing 11% jurisdiction that the rate table implies nor a tax haven for retirees. Its 7.25% ceiling protects UK property and share gains, its pension exclusion reaches employer-funded UK schemes, and its foreign credit recovers UK tax that the federal return wastes. However, the state ignores the foreign earned income exclusion, taxes UK rent in full, holds on to its domiciliaries abroad, and adds a 13% bracket from 2027. In short, the expat tax Hawaii bill rewards families who classify each UK income stream correctly and time their income around the new rates.
Contact Us
If you are moving to Honolulu, already live in Hawaii with UK assets, or are working in London with Hawaii ties, our team can prepare your federal, Hawaii and UK returns together. Please book a consultation with our US-UK tax team, email hello@taxyork.com or call 020 3488 8606.
Disclaimer
This article provides general information about US federal, Hawaii and UK tax rules as they stood in October 2026. It is not tax or legal advice for your specific circumstances, and the case study is illustrative and simplified. Tax rules, rates, thresholds and exchange rates change, and the outcome for your family depends on your full facts. Please take professional advice before acting. TaxYork provides US and UK tax return preparation and compliance services; contact us for help applying these rules to your own situation.