Colorado Pension and Annuity Exclusion Rules

Colorado provides a tax benefit that allows qualifying retirees to subtract a portion of their retirement income from their state taxable income, which can reduce their overall tax liability. The specifics of this exclusion, including who is eligible and how much can be subtracted, are governed by state tax regulations.

Determining Your Eligibility

Eligibility for the pension and annuity exclusion is based on age and the type of income received. The state has three age groups for qualification: under age 55, 55 to 64, and 65 and older. For taxpayers under 55, the exclusion is available only if they are receiving pension or annuity income as a beneficiary due to the death of the person who earned the retirement benefit.

The income must be from a qualifying source. This includes payments from employer-sponsored retirement plans, such as 401(k)s, 403(b)s, and pensions, as well as distributions from Individual Retirement Arrangements (IRAs), military retirement pay, and any federally taxable Social Security benefits.

The exclusion is targeted at retirement income derived from personal services performed before retirement. Other forms of income, such as wages from continued employment, interest, dividends, and capital gains from the sale of assets, are not eligible for the pension and annuity subtraction.

Calculating the Exclusion Amount

The maximum amount of retirement income a taxpayer can exclude depends on their age. For taxpayers age 65 and older, the maximum exclusion is $24,000 per person. If both spouses on a joint return qualify, they can each claim an exclusion on their retirement income for a total subtraction of up to $48,000.

For taxpayers ages 55 to 64, the maximum exclusion is $20,000 per qualifying individual. This amount is applied on a per-person basis, not per household, so a married couple in this age bracket could subtract up to $40,000 if both have sufficient qualifying retirement income.

A taxpayer can subtract income up to the maximum amount allowed for their age group. For taxpayers age 65 and older, if their federally taxable Social Security benefits alone exceed the $24,000 maximum, they are permitted to subtract the entire amount of their taxable Social Security benefits. A surviving spouse who meets the age requirements can claim the subtraction on qualifying retirement income they receive, up to their individual maximum limit based on the same age-based rules.

Claiming the Exclusion on Your Tax Return

To claim the pension and annuity subtraction, taxpayers must use specific Colorado tax forms. The process begins with the Colorado Individual Income Tax Return, Form DR 0104. The detailed calculation for the subtraction is not performed on the main return itself but on a separate schedule, the Subtractions from Income Schedule (DR 0104AD). This schedule is a required attachment if a taxpayer is claiming any state-specific subtractions from their federal taxable income.

On the DR 0104AD schedule, the taxpayer will find a specific line designated for the “Pension and Annuity Subtraction.” Here, the individual enters their calculated exclusion amount based on their total qualifying retirement income and the maximum exclusion for their age. The amount entered cannot exceed the maximum allowed for their age group unless the special rule for Social Security benefits applies.

After completing the DR 0104AD, the total subtractions from that schedule, including the pension and annuity amount, are transferred to a specific line on the main Form DR 0104. This transfer directly reduces the taxpayer’s Colorado taxable income, thereby lowering their overall state tax liability. It is important to ensure this transfer is done accurately to receive the benefit of the exclusion.

While taxpayers are not required to submit their federal Form 1099-R or SSA-1099 documents with their Colorado tax filing, they must retain these forms with their tax records. These forms serve as the primary source documents that substantiate the retirement income being claimed for the subtraction. In the event of a review or audit by the Colorado Department of Revenue, these documents will be required to verify the eligibility and amount of the claimed exclusion.