Is Delaware Tax-Friendly for Retirees?

Is Delaware tax-friendly to retirees? Whether you’re determining where you want to land once retired, you’re relocating to our great state, or you’re here and plan to stay — you know taxation differs from state to state. So how does Delaware rank when it comes to taxes and retirement?

Well you’ll be happy to learn Delaware is often recognized as one of the most tax-friendly states in the US. 

A recent Kiplinger report about taxes and retirement ranked Delaware #1 stating, “Congratulations, Delaware – you're the most tax-friendly state for retirees! With no sales tax, low property taxes, and no death taxes, it's easy to see why Delaware is a tax haven for retirees.” Their explanation pretty much sums it up! Now let's take a closer look at taxes as they relate to retirees and Delawareans.

How Is Retirement Income Taxed in Delaware (Or Anywhere for That Matter)?

First and foremost, Delaware does not tax social security benefits. Retirees 60 and older also qualify for the $12,500 exclusion of retirement income paid to each taxpayer, including pension payments. 

Once you’re retired, your income is more than just Social Security benefits or income from a part-time job. You must remember withdrawals from traditional retirement accounts, the sale of stocks and investments, dividends, and interest are all considered taxable income. 

Delaware has a graduated tax rate meaning your income tax rate rises as your income rises. If your income is under $60,000 your income tax rate will fall between 2.2% and 5.55%, and tops out at 6.6% for those with an income over $60,000.

How Can I Reduce My Taxable Income in Retirement?

There is not a blanket response for how to reduce taxes when retired. That being said, you should take steps to proactively reduce your tax bill each year during retirement. Even though you’ll no longer bring home a salary, taxes will still be one of your biggest expenses. Before we share a few points to consider, remember that taxes should be reviewed with a professional. Your various retirement income streams need to work together to both support you financially and minimize your tax bill each year.

In our world, this is called a withdrawal strategy. A well-orchestrated withdrawal strategy ensures you’re considering minimum distributions and balancing Social Security with withdrawals from your retirement savings and brokerage accounts from a macro level. Withdrawal strategies are unique to each individual or couple as living expenses and goals vary from person to person.

A financial advisor can help you create and manage a withdrawal strategy to help keep your financial plan on track throughout your retirement. To get you thinking, here are a few ways you can save on taxes in retirement:

  • Lower your taxable income on the front-end of retirement by deferring Social Security.

  • Especially for those with a part-time job, understand what tax bracket you will fall into. Remember that as you graduate to higher tax brackets, only the income over each bracket is subjected to a higher tax rate.

  • Consider making a Qualified Charitable Distribution.

  • Review your lifestyle — while paying taxes is inevitable, remember the amount largely coincides with lifestyle choices — think sales tax at the cash register and property taxes in relation to the value of your home.

What Taxes Do Seniors Pay in Delaware?

Seniors and retirees still pay the majority of the same taxes that they did when working. They may see a decrease in taxes if their cost of living is reduced or with lifestyle changes. Here are primary taxes to remember when planning for retirement:

  • Income tax on any income from a part-time job, Social Security, or withdrawal of funds (or gains from an investment) that have not already been assessed income taxes.

  • Property taxes — Delaware has relatively low property taxes averaging at a rate of 0.43% per year. Meaning if you have a $300,000 home, you can expect to pay $1,290 per year in property taxes.

  • Sales tax — Actually, Delaware does not have any state or local sales tax! But with our proximity to neighboring states, don’t forget you’ll often owe taxes at the register when shopping out of state.

As you can see, Delaware is a great place for anyone interested in a tax-efficient retirement. Wherever you live, tax considerations can be made to reduce your lifetime tax bill. Partnering with a professional is often the best way to ensure proper tax consideration is built into your retirement plan.

At Integrated Wealth Management, we build retirement plans that take a person through the three states of retirement: Uncertainty, Stability, and Reflection. For many, proper tax guidance can make a big difference in when you can retire and how much income you have to enjoy each month during retirement. As a CPA-led organization, careful tax consideration is taken during each stage, giving you the confidence that you’re retaining as much of your hard income as possible over the course of your retirement journey.