No, you misunderstand. Start with your Federal 1040A: The gross pension is listed first on Line 12a, but only the net pension (after basis exclusion) on Line 12b is included in AGI on Line 21 (bottom of page 1); that becomes Line 7 of your Hawaii resident return (N-11 -- non-resident returns will be similar). The following HI lines add income taxed by HI but not the IRS (Lines 8-10), and subtract income taxed by the IRS but not HI (Lines 13-18). Since only your *net* pension is included in Line 7, *only* that amount is deducted on Line 13 to make your pension 100% tax-free. Since your basis was deducted in reaching Federal AGI, there is no need to deduct it again.
