Does Colorado Tax Pensions and Social Security?

Yes, Colorado does tax pensions and Social Security, but generous subtractions mean many retirees pay little or nothing on this income. The state applies a flat 4.40 percent rate to retirement income included in your federal taxable income, then lets you subtract up to $24,000 of pension and annuity income if you’re 65 or older, or up to $20,000 if you’re 55 through 64.1Tax Foundation. State Individual Income Tax Rates and Brackets, 2026 Social Security gets its own separate subtraction, and for most retirees age 65 and up it wipes out the state tax on those benefits entirely.2Department of Revenue – Taxation. Income Tax Topics: Social Security, Pensions and Annuities

Neither subtraction happens automatically. You have to claim each one on your Colorado return, and the amounts you enter depend on your age at the end of the tax year and the type of income you received.

The Pension and Annuity Subtraction

The subtraction is a fixed dollar cap on the combined total of your qualifying pension and annuity income, and the cap depends on your age as of December 31.2Department of Revenue – Taxation. Income Tax Topics: Social Security, Pensions and Annuities

  • Age 65 or older: up to $24,000.
  • Age 55 through 64: up to $20,000.
  • Under 55 receiving pension or annuity income as a death benefit: up to $20,000.

You can never subtract more than you actually received. A 67-year-old with $18,000 in pension income subtracts $18,000, not the $24,000 cap.

Married couples filing jointly get to apply the cap to each spouse individually, based on that spouse’s own age and own retirement income. Two spouses both 65 or older with enough qualifying income could subtract up to $48,000 combined. Unused room does not transfer between spouses. If one spouse has $30,000 in pension income and the other has $10,000, the first still caps at $24,000 and the second is limited to their actual $10,000.

How Social Security Is Treated

Colorado’s Social Security subtraction is more generous than the pension subtraction, and it is entirely separate from it. A retiree age 65 or older who has both a pension and Social Security can subtract all of their federally taxed Social Security benefits and up to $24,000 in pension income on top of that.2Department of Revenue – Taxation. Income Tax Topics: Social Security, Pensions and Annuities

  • Age 65 or older: subtract the full amount of Social Security benefits included in your federal taxable income. No cap, no income test.
  • Age 55 through 64 with adjusted gross income at or below $75,000 single or $95,000 joint: subtract the full amount of federally taxed Social Security benefits.
  • Age 55 through 64 with AGI above those thresholds: the subtraction is capped at $20,000.

Only the portion of benefits actually included in your federal taxable income qualifies. That’s line 6b of Form 1040, not the total on line 6a. Retirees with modest income often owe no federal tax on their Social Security, and in that case there is nothing for Colorado to subtract because nothing was added in the first place.

Which Retirement Income Qualifies

The pension and annuity subtraction covers most retirement income that appears on a 1099-R and flows through to your federal taxable income. Qualifying sources include employer pensions, 401(k)s, 403(b)s, 457 plans, traditional IRAs, and federal, state, and local government retirement plans.2Department of Revenue – Taxation. Income Tax Topics: Social Security, Pensions and Annuities The cap applies to all of them combined.

Qualified Roth IRA and Roth 401(k) distributions don’t need a subtraction because they aren’t in your federal taxable income to begin with, so they never reach the Colorado calculation. Lump-sum payouts of sick leave or vacation, unemployment compensation, and life insurance proceeds do not qualify for the subtraction even when received in retirement.

Colorado PERA benefits qualify for the standard pension subtraction like any other pension.

Military Retirement Pay

Military retirees under age 55 have their own subtraction: up to $15,000 of military retirement benefits included in federal taxable income.3Department of Revenue – Taxation. Retired Servicemembers Once you reach 55, that subtraction no longer applies and you switch to the general pension and annuity subtraction instead, which has higher caps ($20,000 at 55 through 64, $24,000 at 65 and up). The military-specific subtraction is currently authorized through tax year 2028.4Colorado General Assembly. Military Retirement Benefits Deduction

Railroad Retirement Is Fully Exempt

Tier 1 and Tier 2 railroad retirement benefits are completely exempt from Colorado state tax. Federal law prohibits any state from taxing them.5Office of the Law Revision Counsel. 45 U.S. Code 231m – Assignability; Exemption From Levy If railroad retirement is your only retirement income, you owe Colorado nothing on it.

Claiming the Subtractions

All of these subtractions are claimed on Form DR 0104AD, the Subtractions from Income Schedule, filed with your Colorado Individual Income Tax Return (Form DR 0104).6Department of Revenue – Taxation. DR 0104AD – Subtractions from Income Schedule The Social Security, general pension, and military retirement subtractions each get their own line. Joint filers enter each spouse’s subtraction separately so the age and income tests apply to the right person.

Keep your 1099-R statements and your SSA-1099 in your records. Colorado doesn’t require you to attach them, but you’ll need them if the Department of Revenue asks about the amounts you claimed.

Withholding and Estimated Payments

If your retirement income exceeds the subtraction limits, the remainder is fully taxable at 4.40 percent, and Colorado requires quarterly estimated tax payments when your total state tax liability after withholding and credits will exceed $1,000 for the year. Underpayment triggers a penalty calculated on each quarter’s shortfall using the state’s interest rate.

Consider a retiree age 65 with $60,000 in pension income and $20,000 in federally taxed Social Security. She subtracts all $20,000 of Social Security and $24,000 of pension income, leaving $36,000 taxable. At 4.40 percent, that’s roughly $1,584 in Colorado tax, comfortably above the estimated-payment threshold.

Two ways to stay ahead of it: ask your pension administrator or IRA custodian to withhold Colorado state tax from your distributions, or make quarterly payments directly to the Department of Revenue using Form DR 0104EP. Federal retirees can set or change state withholding through the OPM Retirement Services Online portal. Doing neither is where retirees end up with an unexpected balance due in April.