The Delaware pension exclusion lets residents aged 60 or older subtract up to $12,500 per person of pension and eligible retirement income from their state taxable income each year. Residents under 60 can exclude up to $2,000, and only from traditional employer or government pensions. For those 60 and older, the definition of eligible income is broad: it covers 401(k) and IRA withdrawals, dividends, capital gains, interest, and net rental income, not just pension checks.1Justia. Delaware Code Title 30 1106 – Modifications Social Security is separately exempt from Delaware tax and doesn’t count against the exclusion.2Division of Revenue – State of Delaware. Personal Income Tax FAQs
Who Qualifies
Any Delaware resident receiving pension income can claim some exclusion. The dividing line is age. If you’re 60 or older at any point during the tax year, you get the $12,500 cap. If you turn 60 during the year, you qualify for the higher amount for the entire year. Under 60, you’re capped at $2,000.1Justia. Delaware Code Title 30 1106 – Modifications
There is no income phaseout for higher earners and no minimum residency period. If you lived in Delaware during the tax year and received qualifying income, you can claim it.
Part-Year Residents
If you moved into or out of Delaware during the year, the exclusion is prorated. Divide your qualifying retirement income earned while a Delaware resident by your total qualifying income for the full year, then multiply that ratio by the applicable cap. A 62-year-old with $152,500 in total retirement income, $100,000 of it earned during the Delaware residency period, has a ratio of about 0.656, giving an allowable exclusion of roughly $8,196.3State of Delaware. Delaware Individual Income Tax Return Non-Resident Instructions
Disabled Retirees Under 60
A separate provision lets people who are totally and permanently disabled exclude up to $2,000 before reaching 60, but only if earned income is under $2,500 and Delaware adjusted gross income doesn’t exceed $10,000.4State of Delaware. Delaware Tax Preference Report – Personal Income Tax This is a different statutory provision from the general pension exclusion, with much tighter limits.
What Income Counts
The category of qualifying income depends entirely on your age.
Under 60, only pensions from employers, the federal government, the State of Delaware, or any Delaware subdivision qualify. That means traditional defined-benefit pension payments, not much else.1Justia. Delaware Code Title 30 1106 – Modifications
At 60 and older, “eligible retirement income” opens up substantially and includes:
- Qualified retirement plan distributions under IRC §4974, including traditional and Roth IRA distributions
- 401(k) distributions, both periodic and lump-sum
- Government deferred compensation plans under IRC §457
- Dividends and capital gains
- Interest income from bank accounts, bonds, and CDs
- Net rental income from real property after allowable expenses
The statute doesn’t distinguish between periodic payments and lump sums for those 60 and older, so a one-time rollover distribution from a 401(k) receives the same treatment as a monthly pension check.1Justia. Delaware Code Title 30 1106 – Modifications If you’re 63 and your retirement income comes mostly from stock dividends and IRA withdrawals rather than a pension, you still qualify for the full $12,500.
Social Security Sits Outside This
Social Security and Railroad Retirement benefits are entirely exempt from Delaware income tax. You don’t include them in Delaware taxable income at all, and they don’t consume any of your $12,500 exclusion.2Division of Revenue – State of Delaware. Personal Income Tax FAQs A retiree with $25,000 in Social Security and $30,000 from a 401(k) pays no Delaware tax on the Social Security and can still exclude $12,500 of the 401(k).
How the Per-Person Limit Works for Couples
The cap is per person. When both spouses are 60 or older and both have qualifying income, each can exclude up to $12,500, for a combined household exclusion of up to $25,000. If one spouse is under 60 and the other is 60 or older, the younger spouse is limited to $2,000 and the older to $12,500.1Justia. Delaware Code Title 30 1106 – Modifications
For accounts held jointly with right of survivorship or as tenants by the entirety, the statute treats the eligible retirement income as received one-half by each spouse. That splitting rule often helps. If one spouse has $20,000 in eligible retirement income from a jointly held account and the other has none, each is treated as receiving $10,000, keeping both under the cap instead of wasting $7,500 of the other spouse’s unused exclusion.1Justia. Delaware Code Title 30 1106 – Modifications
Military Retirement Pay
Military pensions get their own, larger exclusion, and it applies regardless of age. Legislation phased in additional exclusions starting in 2022, reaching a 100% exclusion of military retirement pay for taxable years beginning on or after January 1, 2025.5Delaware General Assembly. Senate Bill 188 – Exclusion of Military Pensions From Taxable Income
For 2026, subsequent legislation restructures the military exclusion as a $25,000 cap. Military retirees under 60 can exclude up to $25,000 of military pension income (compared with $2,000 under the general rule), and those 60 or older can take the greater of $12,500 in general pension and eligible retirement income or $25,000 of military pension income.6Delaware General Assembly. Senate Bill 201 – Exclusion of Military Pensions From Taxable Income “United States military pension” under the statute covers retirement pay from the Army, Navy, Air Force, Marine Corps, Space Force, Coast Guard, the commissioned corps of NOAA, the commissioned corps of the Public Health Service, and the National Guard.
You can’t stack the two. A military retiree under 60 with a $30,000 military pension excludes $25,000, not $25,000 plus the $2,000 general amount.
What the Exclusion Saves You
Delaware uses graduated rates ranging from 0% on the first $2,000 of taxable income up to 6.6% on income above $60,000.7Division of Revenue – State of Delaware. Tax Rate Changes The exclusion peels income off the top of your bracket, so the actual savings depend on your total income.
For a retiree with $50,000 in taxable income before the exclusion, subtracting $12,500 drops taxable income to $37,500, saving roughly $694 at the 5.55% rate. For someone at $80,000, the same $12,500 exclusion saves about $825 because the top of that income falls into the 6.6% bracket.
The exclusion is capped at your actual qualifying income. If you’re 65 with only $8,000 in eligible retirement income, your exclusion is $8,000, not $12,500. Unused amounts don’t carry to a future year.
How to Claim It
Full-year residents claim the exclusion on Line 6 of Form PIT-RES in Section B (Subtractions). Those 60 and older use a worksheet in the form instructions to calculate the amount before entering it on Line 6. Those under 60 enter the exclusion directly on Line 6 without a separate worksheet.8State of Delaware. Delaware PIT-RES Instructions – Resident Instructions
Part-year residents file Form PIT-NON and calculate the prorated exclusion on Line 23 of that form.3State of Delaware. Delaware Individual Income Tax Return Non-Resident Instructions Hold onto your 1099-R forms and other retirement income documentation. Mismatches between federal and state figures are the fastest way to trigger a review.
The Mistake to Avoid
The most common compliance error is claiming the $12,500 amount when you’re under 60. The age threshold is not flexible, and the gap between $2,000 and $12,500 is exactly the kind of discrepancy automated review catches. If Delaware finds an underpayment, interest accrues at 0.5% per month (6% per year) from the original due date until you pay, on top of any penalties.9Justia. Delaware Code Title 30 533 – Interest on Underpayment Keep pension distribution records, 1099-R forms, and supporting documentation for at least three years.
The Exclusion Doesn’t Affect Your Federal Return
The exclusion reduces only Delaware taxable income. You start with federal adjusted gross income and subtract the exclusion when calculating your state figure.1Justia. Delaware Code Title 30 1106 – Modifications Retirement income fully taxable federally can be partially or fully sheltered at the state level.
One point of confusion: Delaware doesn’t tax Social Security, but the federal government may tax up to 85% of your benefits depending on combined income. The Delaware exclusion does not change your federal combined income calculation. If you’re trying to reduce federal tax on Social Security, this won’t help with that.