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Delaware is a great place to spend your golden years!

BY MIKE EASTON, CPA

Before selling your house, packing your bags and heading south or west to spend your golden years, Delawareans would do well to take a close look at the benefits of staying right where they are.

Up and down the state, you will have little trouble locating transplants from New York, New Jersey and the Washington, D.C., metro area who can tell you why the First State is an attractive retirement destination.

Location contributes mightily to Delaware’s appeal – the big city cultural attractions of New York, Philadelphia, Baltimore and Washington – are just a couple of hours away and the pace of life in Delaware is definitely less hurried. And the lure of the beaches of coastal Sussex and the rich history of New Castle County’s Chateau Country cannot be denied.

But an even bigger factor for those transplants – and something that those of us who have lived here for years sometimes tend to overlook – is how the tax burden for retirees in Delaware compares with other states.

No matter where we live, people will complain about taxes. However, if you take a careful look at the numbers, Delawareans have far fewer reasons to complain than residents of most other states.

Let’s start with the easy one: Delaware is one of only four states that do not levy a sales tax. If that’s a priority for you, your other options are chilly New Hampshire, chilly and distant Montana, and even more distant Oregon.

Real estate taxes in Delaware average out at fourth-lowest in the nation, behind only Hawaii, Alabama and Louisiana. In comparison, New Jersey’s rates are the highest in the nation and nearby New York, Pennsylvania and Maryland rank 41st, 39th and 30th, respectively. And it’s worth noting that these taxes are significantly lower in Sussex County, long a popular retirement destination, and Kent County, favored by military retirees, than they are upstate in New Castle County.

Delaware’s income tax rates are among the most favorable in the nation for retirees. Although its top rate – 6.6 percent on income in excess of $60,000 – is higher than either Pennsylvania’s flat rate of 3.07 percent or Maryland’s top rate of 5.75 percent on income in excess of $250,000, Delaware offers tax advantages that many other states don’t match.

For example, Delaware does not tax Social Security benefits. So, if you receive a $3,000 Social Security check each month, that means you’re getting $36,000 a year that is not subject to state income taxes.

On top of that, anyone over 60 qualifies for an exclusion on the first $12,500 of income from pensions and retirement plans (including interest, dividends, capital gains and rental income). The deduction for pension recipients who haven’t turned 60 yet is $2,000.

The standard deduction for taxpayers under 65 is $3,250 for an individual and $6,500 for a couple. For those 65 and over, the deduction is increased to $5,750 for an individual and $11,500 for a couple. Further, the personal tax credit of $110 is doubled for those who are 60 and older.

The cumulative impact of those exemptions, deductions and credits can generate significant savings. From the numbers given here, it’s easy to see that a retired couple could have income of $100,000 or so from Social Security, pensions and a part-time job and not have to pay a penny of state income tax.

As the state’s lawmakers worked their way through a $400 million budget gap in June, they considered some changes to the tax rules, including raising the age to qualify for the pension exclusion, but they ultimately decided to keep things as they are.

The General Assembly did make a big change to benefit those who have enjoyed financial success in their lifetimes. It voted to abolish Delaware’s estate tax, a levy that had piggybacked on the federal tax. Effective January 1, 2018, the elimination of the estate tax will have limited impact, as it had been assessed only on estates valued at $5.49 million or more, but it gives those with substantial assets (and those who aspire to reach such levels) one more reason to maintain a Delaware residence in their retirement years.