While warmer weather or more sunshine may be a big factor in picking a place to retire, considering state taxes on retirement benefits and other financial factors are significant steps in making such a major decision. Tax treatment of retirement benefits varies widely from state to state. For example, some states exempt all pension or Social Security income, others provide only partial exemption or credits and some tax all retirement income.
Colorado is one of the states that allows a pension/annuity subtraction for taxpayers who are at least 55 years of age and beneficiaries of any age who are receiving a pension or annuity because of the death of the person who earned the pension.
Amount of Subtraction
Qualified taxpayers who are under age 65 can subtract up to $20,000 of the taxable pension income. And taxpayers who are 65 years of age or older can subtract up to $24,000 of the taxable pension income.
If each spouse receives income from a pension or annuity, then each spouse must qualify by age to claim the pension subtraction for their own pension or annuity. Each spouse’s subtraction is computed separately and no part of one spouse’s subtraction may be claimed by the other. However, when a married couple receives Social Security benefits and they file a joint income tax return, Colorado law requires that they prorate the benefits between them.
To qualify for the subtraction, a payment must be:
- pension or annuity income that is not considered a premature distribution, and
- reported on the federal return as taxable IRA distributions, pension and annuities, or Social Security benefits , or reported as a lump sum distribution on the Colorado Form 104.
This includes the following:
- a retirement benefit;
- a lump sum distribution from a pension or profit sharing plan to the extent such distribution qualifies for the federal tax averaging computation;
- a distribution from an individual retirement arrangement or a self-employed retirement account;
- amounts received from a privately purchased annuity;
- Social Security benefits.
It is important to remember that premature distributions, regardless of the source, do not qualify for the subtraction. And only the portion of the taxable pension or annuity income that is included in federal taxable income qualifies for the subtraction.
Special rules may apply to 457 plan benefits, disability retirement, nonqualified deferred compensation, PERA and DPS benefits, IRA rollovers and trusts/estates. If you have questions regarding Colorado pension subtraction, BiggsKofford, your Colorado Springs CPA Firm, is here to help.