Hawaii, like many states, starts its tax return with Federal AGI and then makes any necessary adjustments. In that situation, the proper way to report income that is taxed by the Feds but *not* the state is to deduct the Federal taxable amount from Federal AGI. That appears to be what you described, and that is correct. (TurboTax should NOT have used 1099-R gross if the net taxable Federal amount is less, since only the latter amount made it to Federal AGI.)
