By Justin Fundalinski, MBA | October 23, 2017

pensionsAre you receiving Social Security income, taking withdrawals from your IRA’s, or receiving a pension from a past employer?  Well, as a Colorado resident you could have some tax benefits on this income. Under Colorado tax code you may be able avoid including some (or all) of this income as taxable income on your Colorado tax return. Let’s dig into some of the details.

How do I qualify for this Pension and Annuity subtraction?

To qualify for the subtraction you have to meet a few requirements:

  • You have to receive a qualifying pension or annuity income. (I’ll discuss more on this below.)
  • You have to be at least 55 years or older by the end of the tax year.
    • There is an exception to this age criteria for pension or annuity income that is received as a beneficiary because of the death of the person who originally earned the pension/annuity income.

What types of income can be included in this subtraction?

The name of this subtraction is misleading because it is not limited to only pension and annuity income and unfortunately, not all pension and annuity income can be subtracted.  There are some general rules that Colorado has set forth for qualifying income. The income fall into the following categories:

  • Federally taxable income that is, paid periodically, attributable to services performed through employment, and paid after retirement. (This type of income is resulting from an employee-employer relationship, service in the uniformed services of the US, or contributions to an employer based retirement plan that were deductible for federal tax services). This essentially sums up all employer based defined benefit plans (AKA employer pensions), military pensions, and annuitized employer based defined contribution plans (AKA annuitized employer based savings plans).


  • Or, the income could be generated from:
    • Distributions from IRAs
    • Distributions from self-employed retirement accounts
    • Amounts received from fully matured privately purchased annuities
    • Social Security
    • Amounts paid out because of permanent disability, or death of the person entitled to receive the benefits

How much can be subtracted?

Each taxpayer is bound by a maximum allowable subtraction per year. In summary:

  • If you are 65 or older you can subtract up to $24,000 of income
  • If you are between 55 and 65 you can subtract up to $20,000
  • If you are under 55 years old (utilizing the beneficiary exception) you can subtract up to $20,000

Considering the Centennial State has a flat income tax of 4.63% these subtractions often translate to substantial tax savings. For instance, if you are over 65 and maxing out the subtraction (you have more than $24,000 of qualifying pension/annuity income) your tax savings is just over $1,100. Additionally, this figure could double if filing jointly.

What should I watch out for?

There are a few items to be aware of when you are taking this subtraction:

  • Each tax payer is eligible, so married individuals have their own maximum subtraction limit based on age. While this can be a major benefit, each tax payer must their own pension/annuity income to qualify. If one spouse’s pension benefit exceeds the maximum allowable subtraction, the excess cannot be subtracted under the other spouse’s allowable subtraction.
  • Some additional calculations need to be done for spouses that both receive Social Security benefits due to how Social Security is taxed federally. Because the taxable amount of Social Security on the Federal tax return is combined for both spouses and the State requires these amounts to be separate, a little math needs to be done to find out each spouse’s share of the taxable Social Security benefits.
  • Many of pension and annuity benefits do not qualify for the subtraction, so it is important you consult the Colorado tax code or a tax professional to ensure you don’t take the subtraction erroneously.