The bill introduces significant changes to Colorado's taxation of pension, annuity, and Social Security income:
1. Social Security Income Tax Deduction Expansion (Effective January 1, 2025):
Current Law: Individuals aged 65 and older can subtract the full amount of Social Security benefits included in their federal taxable income when determining Colorado state taxable income.
New Provision: Starting in the 2025 tax year, this full deduction is extended to individuals aged 55 to 64 with an adjusted gross income (AGI) up to $75,000 for single filers or $95,000 for joint filers.
2. Removal of Caps on Pension and Annuity Income Deductions (Effective January 1, 2026):
Current Law: Taxpayers aged 55 to 64 can deduct up to $20,000 of pension and annuity income, and those aged 65 and older can deduct up to $24,000.
New Provision: For tax years beginning on or after January 1, 2026, all caps on deductions for pension and annuity income are removed. Any individual, regardless of age or income, can subtract the total amount of pension or annuity income included in their federal taxable income when determining Colorado state taxable income.
These changes aim to reduce the tax burden on retirees and those nearing retirement age, allowing for greater financial flexibility and support.
Summary
Current law allows any individual to deduct amounts, up to certain
caps based on the individual's age, received as pensions or annuities from any source, to the extent included in federal adjusted gross income.
Notwithstanding the caps on the deduction for amounts received
as pensions or annuities from other sources, current law allows any individual who is 65 years of age or older at the close of a taxable year to subtract the total amount of social security benefits that the individual received from the individual's federal taxable income, to the extent those benefits were included in federal taxable income, when determining the individual's state taxable income. Beginning January 1, 2025, this subtraction is also allowed to any individual who is 55 years of age or older and has an adjusted gross income for the applicable tax year that is less than or equal to $75,000 if filing individually or $95,000 if filing jointly.
For income tax years commencing on or after January 1, 2026, the
bill removes all caps on the deduction for amounts received as pensions and annuities and allows any individual, regardless of age or income, to subtract the total amount that the individual received as pension or annuity income from the individual's federal taxable income, to the extent that income was included in federal taxable income, when determining the individual's state taxable income.
