Delaware for retirees: the $12,500 exclusion, Social Security and the new domicile test

Delaware’s treatment of retirees comes down to three rules. Social Security and Railroad Retirement benefits are never taxed, at any age and any income; whatever the IRS taxed comes off on line 8a of Form PIT-RES. At 60 or older, each person excludes up to $12,500 of pension and “eligible retirement income,” a term that reaches well past pensions to IRA and 401(k) withdrawals, dividends, interest, net capital gains and net rental income, so a couple shelters $25,000 a year even with no pension at all. And at 65, the standard deduction grows by $2,500 per person, on top of the extra $110 personal credit that arrives at 60. Beyond those three rules, retirement income is ordinary Delaware income, taxed through the same seven brackets as wages, 6.6% above $60,000 of taxable income. One new wrinkle: a 2026 act added a Delaware-domicile requirement to the age-60 exclusion, and the Division of Revenue has not yet said how it applies to the 2026 return.

The federal side still matters here more than the state side for many retirees. The $6,000 federal senior deduction never reaches Delaware, because Delaware starts from adjusted gross income and the deduction comes off below it. Medicare premiums through IRMAA, and the taxation of Social Security itself, are federal questions and are covered in the federal articles linked at the end.

Social Security: subtracted in full

Line 8a of PIT-RES takes off every dollar of Social Security and Railroad Retirement that appeared in federal AGI. If $30,600 of a $36,000 benefit was taxed federally, $30,600 is in AGI and $30,600 comes off. If none was taxed federally, there is nothing in AGI and nothing to subtract. The result is the same: Delaware tax on Social Security is zero. The subtraction does not use up any of the $12,500 exclusion.

The $12,500 exclusion at 60

Line 6 is the pension and eligible retirement income exclusion, and the test is your age on December 31. At 60 or older you add up two things: pension income, and eligible retirement income. Eligible retirement income, as the PIT-RES instructions and 30 Del. C. §1106(b)(3) define it, is distributions from qualified retirement plans, 401(k) arrangements and governmental 457 plans, including IRAs, plus dividends, capital gains net of capital losses, interest and net rental income from real property. You exclude the total or $12,500, whichever is less. On a joint return each spouse works the exclusion separately; income from a joint account counts half to each. A couple with $9,000 of dividends in a joint brokerage account and a $20,000 IRA withdrawal in the husband’s name excludes $12,500 for him ($20,000 plus $4,500, capped) and $4,500 for her.

Each taxpayer gets only one exclusion. Early distributions, meaning a 1099-R with code 1 in box 7 or any distribution that drew the federal early-withdrawal penalty, do not qualify, and neither does a disability pension paid before the plan’s minimum retirement age. Government pensions, including federal civil service and Delaware state pensions, get the same $12,500 and nothing more.

The military figures after 2026 are from SB 219 (85 Del. Laws c. 426). A person 60 or older with a military pension takes the larger of the two exclusions, not both.

Under 60: $2,000, and only pensions

Before 60 the exclusion shrinks to $2,000, and the class of income narrows to pensions. An IRA or 401(k) withdrawal at 58 is fully taxed by Delaware; dividends and gains at 58 are fully taxed. The one exception is a U.S. military pension, which qualifies for $12,500 at any age. For a couple retiring in their late fifties on IRA withdrawals, the two years before 60 are expensive years to draw heavily, and a year of smaller withdrawals bridged by cash or Roth money can save several hundred dollars of Delaware tax.

The new domicile requirement

SB 219, signed August 17, 2026, was presented as a military-pension increase, and it is one. But the same act rewrote §1106(b)(3) so that a person 60 or older may claim the exclusion only if “legally domiciled in this State for at least 3 years” when domiciled here before January 1, 2027, or at least 5 years when domiciled here on or after that date. The sentence covers every 60-and-over claimant, not only military retirees. The act took effect on signature. The Division of Revenue has issued no guidance on how the requirement applies to the 2026 return or how PIT-RES will ask about it (verify). Read as written, a retiree who moved to Delaware in 2024 would not qualify for the $12,500 until the 2027 return, and one who arrives in 2027 would wait five years. This article states the code as it reads; a reviewer question is pending, and the point is flagged in What’s new in Delaware for 2026. Anyone who moved to Delaware within the past three years and is 60 or older should ask before counting on the exclusion.

Roth conversions: taxed, with a $12,500 cushion

A Roth conversion is a distribution from a traditional IRA reported on federal line 4b, and it lands in federal AGI, which is where Delaware starts. At 60 or older the converted amount is eligible retirement income and can use whatever part of the $12,500 exclusion is not already taken by other IRA, pension or investment income. Beyond that, it is taxed at the ordinary brackets, 6.6% on the slice above $60,000 of taxable income. Under 60 it gets no exclusion at all. For a retiree whose exclusion is already filled by a pension, a $50,000 conversion costs about $3,300 of Delaware tax at the top rate, on top of the federal tax. The conversion also raises federal AGI, which can make more Social Security taxable federally and lift Medicare premiums two years later. Converting in the year of a move out of Delaware, or spreading conversions over several years to stay under $60,000 of taxable income, are the two levers that matter here.

The standard deduction at 65, and itemizing

The Delaware standard deduction is $3,250 single and $6,500 joint. At 65, each taxpayer or spouse adds $2,500, and a blind taxpayer adds another $2,500, to a maximum of $5,000 per person; so a couple both 65 or older takes $11,500. The additions are available only with the standard deduction. A retiree with a paid-off house and modest medical bills usually takes it. A retiree with large medical expenses, over 7.5% of AGI, or with a mortgage and property tax may do better itemizing on Form PIT-RSA, which Delaware allows even if the federal return took the standard deduction. Run both.

The federal senior deduction, and why it does not help here

The $6,000 federal deduction for people 65 and older, in effect for 2025 through 2028, comes off after adjusted gross income, alongside the federal standard deduction. Delaware starts from AGI, so the deduction never enters PIT-RES and no add-back is needed. The Division of Revenue’s Tax Season Updates page named tips, overtime and car-loan interest as federal deductions that do not flow through because they are not itemized deductions; it did not name the senior deduction, but the same rule governs it (verify). What Delaware gives seniors instead is the $110 credit at 60, the $12,500 exclusion at 60 and the $2,500 deduction at 65.

Relief outside the income tax

There is no senior credit, renter credit or property tax credit on PIT-RES. Delaware’s help with the property tax bill is handled by the counties and the Department of Finance, not the Division of Revenue, and none of it appears on the income tax return.

All three counties completed court-ordered reassessments in 2024 and 2025, the first in decades, so many 2025 and 2026 bills changed sharply. Check the bill for the school credit line; it does not apply itself.

Withholding and estimates

Pension and IRA payers will withhold Delaware tax on request. A couple whose income is mostly Social Security and two exclusions’ worth of retirement income owes little or nothing and can skip it. A retiree with a large pension, a taxable brokerage account or a planned Roth conversion should either have Delaware tax withheld from the pension or pay estimates on Form PIT-EST, due April 30, June 15, September 15 and January 15. Estimates are required once Delaware tax after withholding will exceed $800; the safe harbor is 90% of this year’s tax or 100% of last year’s, and the penalty is 1.5% a month.

Estate and inheritance

Delaware has no estate tax, repealed for people who died after December 31, 2017, and no inheritance or gift tax. The federal estate tax, with its $15 million exemption for 2026, is the only one a Delaware estate faces. Inherited IRAs are taxed to the beneficiary as ordinary Delaware income when withdrawn, with the $12,500 exclusion available if the beneficiary is 60 or older.