Does Delaware Tax Nonresident Income? What You Need to Know

Delaware’s tax policies are important for nonresidents earning income within the state. As a hub for various industries, Delaware attracts individuals whose financial activities may trigger tax obligations despite not residing there. Understanding these obligations helps avoid unexpected liabilities.

This discussion examines key aspects of how Delaware taxes nonresident income, focusing on filing requirements and available deductions or credits.

Who Must File as Nonresident

Nonresidents earning income from Delaware sources must file a Delaware Nonresident Income Tax Return, Form 200-02, if their income exceeds the state’s filing threshold. For the 2024 tax year, nonresidents must file if their Delaware-sourced income exceeds $9,400 for single filers or $18,800 for married couples filing jointly.

Income subject to Delaware tax includes wages, salaries, and compensation for services performed in the state. This also extends to income from businesses, partnerships, or LLCs operating in Delaware. Nonresidents participating in Delaware-based business activities, whether through employment or self-employment, must assess their filing obligations. Delaware’s tax code mandates that income attributable to the state is taxable, regardless of residency.

Income from Delaware real estate, such as rental income or capital gains from property sales, also requires nonresidents to file. Financial gains from property transactions within the state are taxable, as is income from trusts or estates tied to Delaware. These rules emphasize the state’s broad approach to taxing income connected to its jurisdiction.

Types of Income Subject to Delaware Tax

Delaware taxes various income streams originating in the state. Earnings from employment or services performed in Delaware, including wages, salaries, bonuses, and commissions, are taxable. If the work is done in Delaware, the income is subject to tax, regardless of the nonresident’s home state.

Business and self-employment income from nonresidents engaged in Delaware activities is also taxable. The state uses an apportionment formula to determine the taxable portion of business income, factoring in property, payroll, and sales within Delaware, consistent with the Uniform Division of Income for Tax Purposes Act (UDITPA).

Investment and passive income, such as interest, dividends, and capital gains sourced from Delaware, are taxable for nonresidents. For example, dividends from Delaware corporations or rental income from Delaware real estate are subject to state tax. Gains from the sale of Delaware property are taxable, reflecting the state’s comprehensive tax policy on property-related income.

Allocation of Income Inside and Outside Delaware

Allocating income between Delaware and other jurisdictions is essential for nonresidents to determine the portion subject to Delaware tax. This process involves evaluating income sources and applying appropriate allocation methods.

Wages and Salaries

Nonresidents allocate wages and salaries to Delaware based on the proportion of work performed within the state, typically calculated using a ratio of Delaware workdays to total workdays. For instance, if a nonresident works 50 days in Delaware out of 250 total workdays, 20% of their salary is allocated to Delaware. Employers withhold Delaware taxes on this income, and nonresidents must report it on Form 200-02. Accurate records of work locations and days are crucial for proper allocation.

Business and Self-Employment Earnings

Nonresidents must allocate business or self-employment income to Delaware using the state’s apportionment formula. This formula considers property, payroll, and sales within Delaware, with each factor weighted equally. For example, if 30% of a business’s property, 40% of its payroll, and 50% of its sales are in Delaware, the apportionment percentage would be 40%. This ensures income is allocated based on the business’s economic presence in the state. Nonresidents should maintain detailed records of business activities and financial data to apply this formula accurately.

Investment and Passive Income

Nonresidents allocate investment and passive income by identifying its source. Interest and dividends from Delaware-based financial institutions or investments are fully taxable. Capital gains allocation depends on the asset’s location. Gains from Delaware real estate sales are entirely taxable, while gains from securities or intangible assets are generally not taxed unless directly connected to Delaware. Reviewing investment portfolios and consulting Delaware tax statutes is essential to ensure proper reporting and avoid errors.

Deductions and Credits for Nonresidents

Deductions and credits can significantly reduce tax liabilities for nonresidents. Delaware allows deductions for business expenses directly related to Delaware-sourced income, such as travel costs for business operations in the state. These deductions must comply with IRS guidelines under Section 162, which defines ordinary and necessary business expenses.

Nonresidents may also benefit from credits, such as the Delaware tax credit for income taxes paid to other states. This credit prevents double taxation for individuals who pay income taxes to both Delaware and their home state. Proper documentation of taxes paid to other jurisdictions is critical to claim this credit when filing Delaware returns.

Filing and Payment Steps

Filing and paying Delaware taxes as a nonresident requires careful adherence to state regulations. Nonresidents must use Form 200-02 to report Delaware-sourced income, deductions, credits, and income allocation. Filing deadlines align with federal tax deadlines, typically April 15, unless an extension is granted. However, extensions only apply to filing, not to tax payments, and interest accrues on unpaid balances.

Delaware encourages the use of its online portal, Delaware Taxpayer Access Point (TAP), for filing returns, making payments, and tracking tax accounts. Payments can be made electronically through TAP or by mailing a check with a payment voucher. Nonresidents expecting to owe more than $400 in Delaware taxes must make estimated quarterly payments, due on April 30, June 15, September 15, and January 15 of the following year. Timely payments are essential to avoid penalties or interest.