Inherited IRA

[Artbuc]

Jurisdiction

Delaware

Are distributions from an inherited IRA considered retirement income in the state of Delaware? In other words, does the state of Delaware make a distinction between distributions from your own personal traditional IRA and distributions from an IRA you inherited?

I am pretty sure the Feds do not make a distinction on how the distributions are taxed even though the rules on making distributions are different. Thanks.

 

[adjusterjack]

Delaware income tax doesn't address IRA distributions at all, because the tax return starts with you federal adjusted gross income which has already addressed IRA distributions.

PIT-RES_TY22_2022-01_PaperInteractive.pdf (delaware.gov)

PIT-RES_TY22_2022-01_Instructions.pdf (delaware.gov)

 

[Tax Counsel]

Delaware income tax doesn't address IRA distributions at all, because the tax return starts with you federal adjusted gross income which has already addressed IRA distributions.

Not so. While DE income tax returns start with federal adjusted gross income (AGI), DE does exclude from income a certain amount of qualified plan income (IRAs, 401(k)s, etc) from tax. That will be done as an adjustment to your federal income on the return. From the Delaware Department of Revenue FAQ page:

Q. I'm planning to move to Delaware within the next year. I am retired. I am receiving a pension and also withdrawing income from a 401K. My spouse receives social security. What personal income taxes will I be required to pay as a resident of Delaware? I also would like information on real estate property taxes.

A. As a resident of Delaware, the amount of your pension and 401K income that is taxable for federal purposes is also taxable in Delaware. However, person's 60 years of age or older are entitled to a pension exclusion of up to $12,500 or the amount of the pension and eligible retirement income (whichever is less). Eligible retirement income includes dividends, interest, capital gains, net rental income from real property and qualified retirement plans (IRS Sec. 4974), such as IRA, 401 (K), and Keough plans, and government deferred compensation plans (IRS Sec. 457). The combined total of pension and eligible retirement income may not exceed $12,500 per person age 60 or over. If you are under age 60 and receiving a pension, the exclusion amount is limited to $2,000.

Social Security and Railroad Retirement benefits are not taxable in Delaware and should not be included in taxable income.

Also, Delaware has a graduated tax rate ranging from 2.2% to 5.55% for income under $60,000, and 6.60% for income of $60,000 or over.​

 

[Artbuc]

Thx, but that does not answer my question. I will call Del and report back. Let me ask it this way, does a distribution from an inherited IRA qualify for the $12,500 exclusion?

 

[Tax Counsel]

Thx, but that does not answer my question. I will call Del and report back. Let me ask it this way, does a distribution from an inherited IRA qualify for the $12,500 exclusion?

It appears that it does. What Delaware's instructions for the pension line on its return is the following:

Page 6
Line 6 Pension Exclusion
Amounts received as pensions from employers (including pensions of a
deceased taxpayer) may qualify for an exclusion from Delaware taxable
income, subject to the limitations described below.

An early distribution from an IRA or pension fund for emergency
reasons or following a separation from employment does not qualify
for the pension exclusion. If the distribution code listed in Box 7 of
your 1099 R is a 1 (one), or if you were assessed an early withdrawal
penalty on Federal 1040, Schedule 2, Line 8 for the distribution, then
that distribution DOES NOT qualify for the pension exclusion.
​

You will notice it specifically references pensions of deceased taxpayers as being eligible for the exemption and the only thing that seems to disqualify the IRA distribution from the exemption is if under the federal rules an early distribution penalty would apply to that distribution.

But if you have any uncertainty about it then calling the state revenue department and asking about it is worthwhile. It just costs you time (which might include some considerable wait time depending on how fully staffed they are).

 

[Artbuc]

Ok, thx. I would have never picked up that subtlety. I would not mind holding but I would never expect to get anyone who would give me a reliable answer.

 

[Artbuc]

I am back again with another question. Does a Delaware resident have to PA inheritance tax on an IRA inherited from a PA resident?