Does Colorado Tax Military Retirement?

While Colorado does not offer a full tax exemption for military retirement pay, it provides a tax benefit through a pension and annuity subtraction. This allows eligible retirees to reduce their total income subject to state tax. The specific amount of this subtraction depends on the taxpayer’s age and the total retirement income received, lowering the state income tax liability for many military retirees.

The Colorado Pension and Annuity Subtraction

The state’s main tax benefit for retirees is the Pension and Annuity Subtraction. This is not a tax credit, which reduces the amount of tax owed, but a subtraction that lowers your total income subject to tax. The value of this subtraction is determined by the taxpayer’s age.

A separate provision exists for retired service members under the age of 55. These individuals can subtract up to $15,000 of their military retirement pay from their taxable income. This rule ensures younger military retirees receive a state tax benefit.

For taxpayers who are at least 55 years old but not yet 65, the maximum subtraction for all qualifying pension and annuity income is $20,000. This cap applies to the total sum of retirement income, not just military retirement pay.

For those aged 65 and older, the maximum subtraction increases to $24,000 per year. This higher limit is also applied to the aggregate of all qualifying pension and annuity income received by the taxpayer.

Qualifying Income Sources

The Pension and Annuity Subtraction applies to a wide range of retirement income. Beyond military-specific pay, the subtraction covers many common forms of retirement distributions.

• Military retirement pay from any branch of the U.S. Armed Forces
• Payments from the Survivor Benefit Plan (SBP)
• Payments from traditional and Roth IRAs
• Distributions from 401(k) and 403(b) plans
• Benefits from private and public pension plans

For surviving spouses aged 55 and older receiving SBP payments, these are combined with other retirement income and subject to the standard age-based limits. A special provision applies to beneficiaries under age 55 who receive pension or annuity income due to the death of the person who earned it. For this group, the subtraction is limited to $20,000.

How to Claim the Subtraction on Your Tax Return

To claim the pension and annuity subtraction, you must complete and attach the Colorado Subtractions from Income Schedule to your state tax filing. This schedule is where you will detail and calculate your eligible subtractions.

On the schedule, you will find a line for the pension and annuity income subtraction. You must enter the total amount of your qualifying income on this line, not to exceed the maximum amount allowed for your age.

After calculating the total subtraction, you transfer this amount to the corresponding line on the main Colorado Individual Income Tax Return. This figure reduces your Colorado taxable income.