You may have vacationed here, owned a second home, or simply discovered it’s a great place to retire. But what does it really mean to become a full-time resident at the beach? We’ll cover some of the considerations from a planning, tax, estate, and practical perspective.

Key Takeaways:

1. Delaware is likely to be far more tax-friendly to retire into than other states in the Northeast
2. There are unique advantages for estate and long-term care planning.
3. Delmarva is a rural area, so you’ll want to plan ahead for healthcare and new professional relationships

Becoming a Resident – First Things First

For many retirees moving to Delaware, changing state residency is something they’ve never done before. Hopefully, this will be the last time you’ll need to change your residence!

Residency rules for tax purposes generally require you to maintain a state domicile for at least 6 months and 1 day. So, if you’re moving from New Jersey and purchasing your retirement home in Delaware, just owning the home doesn’t make you a resident—yet.

In recent years, some northeastern states have become more aggressive in auditing residents to ensure they meet the 183-day test. This can include reviewing cell phone data, where you receive mail, and other digital footprints.

When you make the move, you’ll want to update at least the following:

1. Driver’s License and Vehicle Registration
2. Voter Registration
3. Tax filings and withholding

The bottom line: don’t get too aggressive in claiming Delaware residency if you’re not actually ready to live here more than 6 months a year. You should be ready to make the three changes above if you’re going to consider yourself a resident—especially if you’re moving from one of the more aggressive northeastern states.

Unique Tax Benefits of Delaware

One of the biggest benefits of moving to Delaware for retirement is the lower overall tax burden.

Sales Tax

Delaware is famous for its lack of a sales tax—only one of five states without one. In retirement, this is especially important.

When you retire, you transition from living off your “human capital” (your ability to work) to the resources you’ve accumulated. Those resources are finite, and not having a sales tax stretches them further.

According to the Bureau of Labor Statistics, consumers on average spend 30–40% of their income on taxable goods and services. For a household with $100,000 in retirement income, that means about $30,000–$40,000 of spending could be subject to sales tax.

The Tax Foundation reports the average state and local sales tax is approximately 7.7%. Using the midpoint of spending ($35,000), that would mean about $2,695 per year in sales tax—or 2.695% of income. Over a 25-year retirement, that’s $67,375. At 3.5% annual growth, that grows to $159,224. That’s money you could be using for something else in retirement!

You can see below from how Delaware stands out amongst the East Coast for its lack of a sales tax.

Retirement Tax Provisions

Delaware also has special income tax provisions for retirees. The amount of 401(k) or IRA distributions that are taxable for federal purposes are also taxable for state purposes.

However, residents aged 60 or older are entitled to exclude up to $12,500 of pension or eligible retirement income. According to the Delaware Department of Revenue, eligible income includes dividends, interest, capital gains, net rental income, and qualified retirement plan distributions (401(k), 403(b), IRA, 457(b), etc.).

For a married couple, that’s $12,500 each, or $25,000 total. With Delaware’s progressive income tax topping out at 6.6%, that exclusion can mean up to $1,650 in annual tax savings—just for being over 60.

On top of that, Social Security benefits are not taxed in Delaware.

While nine states don’t impose any income tax at all, 27 others—including Delaware—offer some kind of exclusion for retirement income.

Estate Taxes (or Lack Thereof)

We’ve covered the federal gift and estate tax in our gifting blogs (see #1 here and #2 here. For many states, similar to income tax, there is also an estate tax. These typically fall into three categories:

1. No estate tax
2. Match the federal exemption
3. Separate state estate tax

Delaware falls into the first category. In January 2018, Delaware repealed its estate tax.

However, Delaware—and specifically Sussex County—does impose probate fees. Generally, any net estate value is charged 1.25%.

It’s important to work with your financial advisor and estate attorney to ensure you have the proper beneficiary designations and/or trusts in place to avoid unnecessary probate fees. Probate and the associated costs in most cases can be avoided with simple estate planning techniques.

1.25% can add up depending on the size of the estate. Beyond the cost, probate typically takes about a year to settle. As the saying goes, time is money.

Property Taxes

While not as widely advertised as Delaware’s other tax benefits, property taxes in Sussex County are another major perk. Compared to Maryland, New Jersey, or Pennsylvania, they’re often dramatically lower—a “hidden gem” of savings for those relocating to the Delaware coast.

Property taxes in Sussex County are among the lowest in the country, with a typical rate of 0.57% of assessed value. On a $400,000 home, that works out to about $1,000–$1,500 annually.

For many retirees relocating from higher-tax states, the savings can amount to tens of thousands of dollars over time. This also makes it easier to afford two homes temporarily if you’re easing into retirement.

On top of that, after 10 years of Delaware residency you can qualify for an additional $500 property tax credit for the amount of property taxes that goes to school funding—further lowering your bill. You’ll need your license and proof of residency to apply. As soon as you have established residency, you’ll want to start the clock to obtain this credit.

In Summary

It isn’t rocket science why Sussex County is becoming one of the hottest retirement destinations in the country. The natural beauty, quality of life, and coastal amenities are attractive on their own. Add in the tax benefits, and retiring here becomes an easy decision.

We’ve run side-by-side comparisons of tax savings when choosing a retirement state. If you’re on the fence about making Delaware your retirement home, we’d be glad to walk through the numbers with you.