Yes, Colorado taxes pensions and Social Security, but most retirees pay far less than the flat 4.40 percent rate suggests. If you’re 65 or older, you can subtract up to $24,000 of pension and annuity income from what Colorado taxes, and you can usually subtract every dollar of Social Security that showed up on your federal return. Retirees aged 55 through 64 get a $20,000 pension subtraction and, if their income is modest enough, the same full Social Security exclusion.
How the Tax Actually Works
Colorado uses your federal taxable income as its starting point, not your gross income.1Department of Revenue – Taxation. Individual Income Tax Guide So your federal standard or itemized deduction has already shrunk the number before Colorado applies its flat 4.40 percent rate.2Tax Foundation. State Individual Income Tax Rates and Brackets, 2026 Distributions from a 401(k), traditional IRA, pension, or annuity that count in your federal taxable income start out taxable in Colorado too.
From there, Colorado lets you subtract specific amounts. The pension and annuity subtraction is the main one, and Social Security has its own separate subtraction with different rules. Neither applies automatically. You have to claim each one on your state return.
Social Security: Most Retirees Pay Nothing
Colorado’s treatment of Social Security is the most generous piece of the picture, and how much you can subtract depends on your age and income.3Department of Revenue – Taxation. Income Tax Topics: Social Security, Pensions and Annuities
- At age 65 or older, you can subtract the entire amount of Social Security benefits included in your federal taxable income. No cap, no income test.
- At ages 55 through 64, you can subtract the full amount if your federal adjusted gross income is at or below $75,000 (single) or $95,000 (joint).
- At ages 55 through 64 with AGI above those thresholds, the Social Security subtraction is capped at $20,000.
Only the portion of benefits actually included in your federal taxable income qualifies. That’s line 6b on Form 1040, not the total on 6a. If your income is low enough that the federal government taxes none of your Social Security, there’s nothing for Colorado to subtract because there’s nothing in the base to begin with.
Pension and Annuity Subtraction
The pension subtraction has fixed dollar caps based on your age as of December 31 of the tax year, and the cap applies to the combined total of your qualifying retirement income.3Department 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 a death benefit from someone else’s pension or annuity: 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 $24,000.
For married couples filing jointly, each spouse qualifies on their own age and their own income. Two spouses age 65 or older with enough income could subtract up to $48,000 combined, but one spouse can’t borrow the other’s unused room. If one has $30,000 in pension income and the other has $10,000, the first still caps at $24,000 and the second at $10,000.
The Social Security subtraction and the pension subtraction are separate. A retiree 65 or older with both can subtract all federally taxed Social Security plus up to $24,000 in pension income. They don’t share a single cap.
What Counts as Qualifying Pension Income
Most retirement income that lands on a 1099-R and gets included in your federal taxable income qualifies: employer pensions, 401(k)s, 403(b)s, 457 plans, traditional IRAs, and federal, state, and local government retirement plans.3Department of Revenue – Taxation. Income Tax Topics: Social Security, Pensions and Annuities The cap applies to the total of all of them.
Qualified Roth IRA and Roth 401(k) distributions sit outside this picture entirely. Because Colorado starts with federal taxable income and qualified Roth distributions aren’t in that number federally, they never reach your Colorado return in the first place. There’s nothing to subtract.
Lump-sum sick leave or vacation cashouts, unemployment compensation, and life insurance proceeds don’t qualify for the pension subtraction, even when received in retirement.
Military Retirement Pay
Military retirees under age 55 get their own subtraction of up to $15,000 of military retirement benefits included in federal taxable income.4Department of Revenue – Taxation. Retired Servicemembers Once you hit 55, you stop using the military-specific line and shift to the general pension subtraction, which gives you $20,000 at 55 through 64 and $24,000 at 65 and up. The switch raises your subtraction, not lowers it. The military retirement subtraction is currently authorized through tax year 2028.5Colorado General Assembly. Military Retirement Benefits Deduction
Railroad Retirement Is Fully Exempt
Tier 1 and Tier 2 railroad retirement benefits are completely exempt from Colorado tax. Federal law bars every state from taxing them.6Office of the Law Revision Counsel. 45 U.S. Code 231m – Assignability; Exemption From Levy If railroad retirement is your only retirement income, Colorado takes nothing.
Don’t Get Caught Short in April
Without an employer withholding taxes from a paycheck, retirees can land a big bill at filing time. Colorado requires quarterly estimated tax payments if your total state tax liability, after withholding and credits, will exceed $1,000 for the year. The penalty for underpaying is calculated using the state’s income tax interest rate on each quarter’s shortfall.
Two ways to stay ahead of it: ask your pension plan administrator or IRA custodian to withhold Colorado state income tax from your distributions, or send quarterly estimated payments to the Colorado Department of Revenue using Form DR 0104EP. Either works. Doing neither is where retirees get caught, because once your retirement income exceeds the subtraction limits, every remaining dollar is taxed at the full 4.40 percent.
Claiming the Subtractions on Your Return
Both subtractions go on Form DR 0104AD, the Subtractions from Income Schedule, which you file with your Colorado Individual Income Tax Return (Form DR 0104).7Department of Revenue – Taxation. DR 0104AD – Subtractions from Income Schedule The Social Security subtraction, the military retirement subtraction, and the general pension subtraction each have their own lines. Joint filers enter each spouse’s amounts separately so the age and income rules apply to the right person.
Keep your 1099-R statements and your SSA-1099 Social Security benefit statement with your records. Colorado doesn’t make you attach them to your return, but you’ll want them if the Department of Revenue asks you to back up the numbers.