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september 16, 2007 -- My wife and I receive social security income and some pension income from my job after I retired. With our limited income is there any way to save some taxes on these kinds of income?

For most retirees Social Security or pension income from their previous job is the life blood of their retirements. Any way to save some taxes on this limited income would be a welcomed benefit. Colorado is trying to help by having the pension/annuity subtraction. The pension/annuity subtraction is a subtraction from the Colorado taxable income for all or a portion of the pension and annuity income taxable on the federal return. Colorado allows this subtraction for taxpayers with the following characteristics:

  • Taxpayers who are at least 55 years of age as of the last day of the tax year
  • Beneficiaries of any age (such as a widowed spouse or orphan child) who are receiving a pension or annuity because of the death of the person who earned the pension

Qualifying Income

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.

Amount of Subtraction

Qualified taxpayers who are under age 65 as of the last day of the tax year can subtract the smaller of:

  • $20,000, or
  • The taxable pension/annuity income included in federal taxable income.

Taxpayers who are 65 years of age or older as of the last day of the tax year can subtract the smaller of:

  • $24,000, or
  • The taxable pension/annuity income included in federal taxable income.

Each spouse must qualify by age to claim the pension subtraction. Each spouse’s subtraction is computed SEPARATELY and no part of one spouse’s $20,000 or $24,000 subtraction may be claimed by the other.

Example

Joseph (age 66) and Catherine (age 63) receive social security benefits of $20,000, $6,000 of which was taxable on their joint federal return. Joseph received $12,000 of the benefits while Catherine received $8,000. Catherine also earned a private pension of $22,000, $18,000 of which was taxable on the federal return.

  • Joseph’s pension subtraction is computed by taking his share of the total Social Security benefits paid times the taxable benefits (60% of $6,000), which is $3,600.
  • Catherine’s pension subtraction is computed by taking her share of the Social Security benefits times the taxable benefits (40% of $6,000) and adding her taxable private pension ($18,000), which is $20,400. Because Catherine is under age 65 her subtraction is limited to $20,000.

Benefits Received Due to the Death of the Person Who Earned the Pension

A $20,000 pension/annuity subtraction is available to taxpayers under the age of 55, but only to beneficiaries who receive eligible pension or annuity income because of the death of the person who earned the pension. The beneficiary does not have to be related to the decedent to qualify for the subtraction and there is no requirement that the deceased be 55 or older.

With Colorado being an attractive area to live in or retire to, Colorado has helped lessen the burden of taxes with the pension/annuity subtraction from Colorado taxable income.

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