Significant Tax Help for Colorado Seniors

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The news this year in regard to Colorado income tax has focused on the TABOR refunds that every filer received. What was missed by many was the passage of HB 21-1311 which made several changes to Colorado income tax policy. For a full summary of HB 21-1311, please click HERE

For seniors on Social Security, there is some really good news. None of your Social Security is taxed in Colorado. Because of the Colorado Pension Deduction, many seniors probably were not paying Colorado taxes on their Social Security before, but this will help many.

To understand the impact of the change, the first step is to understand how the Colorado Pension Deduction previously worked. This deduction is limited to $20,000 per person for people aged 55 through 64. The deduction increases to $24,000 for those 65 and older. The deduction used to apply to federally taxable pension and annuity income, 401(k)/IRA federally taxable distributions, and the amount of federally taxable Social Security. The deduction now uses the same limits but only applies to federally taxable pension, annuity, and qualified distributions. The amount of federally taxable Social Security is then added to whatever the pension deduction, subject to limits, equals.

Sounds complicated, right? Taxes tend to be that way. The best way to illustrate is with an example. John and Susie Sample are retired, both age 67. Their income consists of corporate bond interest of $25,000, his Social Security of $30,000, her Social Security of $24,000, his IRA distribution of $25,000, and her IRA distribution of $12,000. Their total cash flow in is $116,000. The adjusted gross income is only $106,250 because only $44,250 of their total Social Security benefits are taxable (81.84%). Their 2022 standard deduction is $28,700 so they end up with $77,550 of federal taxable income, with federal taxes due of $8,893.

Colorado taxable income is based on federal taxable income – with some modifications for some people. Before HB 21-1311, they would have had a total pension deduction of $48,000 and had taxable income of $29,550, with taxes due of $1,330. Based on the new way the deduction is calculated, their pension and Social Security deduction moves up to $80,250. The Colorado taxable income is zero, so no Colorado income tax is due.

If you have further questions, or you know this may apply to you, feel free to reach out to us. Give us a call at 720-729-2500 or email us at [email protected]