Colorado Expands Social Security Tax Relief for Ages 55–64: What You Need to Know

Colorado Expands Social Security Tax Relief for Ages 55–64: What You Need to Know

• Colorado residents receiving Social Security benefits are getting some good news—especially those between the ages of 55 and 64.
• Thanks to House Bill 24-1142, the state has broadened tax relief for this group by eliminating the previous cap on the Social Security income subtraction for qualified taxpayers.
• Here’s what this means for you and how to take advantage of the change.

What’s Changing?

• Traditionally, Colorado has allowed individuals 65 and older to subtract all federally taxable Social Security income from their Colorado taxable income.
• However, younger beneficiaries (ages 55–64) were subject to a $20,000 subtraction limit.
• Starting in tax year 2024, that limit is gone—at least for individuals who meet specific income requirements.

Eligibility Criteria

To qualify for unlimited subtraction of Social Security benefits from Colorado taxable income, you must:

• Be between the ages of 55 and 64,
• Have a federal adjusted gross income (AGI) of:
  • $75,000 or less if filing single, or
  • $95,000 or less if filing jointly.

This change is expected to benefit around 2,000 taxpayers in Colorado.

How to Claim the Subtraction

Qualified taxpayers should include the subtraction on the DR 0104AD Schedule—the Subtractions from Income Schedule—when filing their Colorado income tax return. Be sure to:

• Subtract only the amount of Social Security included in your federal taxable income,
• Submit the DR 0104AD with your Colorado return.

Important Caveat – Watch the Income Limits

• If your AGI exceeds the income threshold, you are not eligible for the unlimited subtraction and must revert to the standard $20,000 limit. Claiming more than allowed could result in audit issues or penalties.

Impact on Pension and Annuity Subtraction

• Colorado also allows a subtraction for pension and annuity income, but there’s a catch:
• Any Social Security subtraction reduces your allowable pension and annuity subtraction.
• So, if you subtract $15,000 in Social Security benefits, you can only deduct up to $5,000 in pension/annuity income (if your overall limit is $20,000).

For more information and official guidance:

• Income Tax Topics: Social Security, Pensions, and Annuities publication
• Refer to Colorado Revised Statutes § 39-22-104(3)(f)(I)(A)

Key Takeaways

• Colorado continues to expand tax relief for retirees and near-retirees.
• If you’re between 55 and 64, receiving Social Security, and fall within the income limits, this change could significantly lower your tax bill.
• Planning ahead and consulting a tax professional can help you maximize your benefits while staying compliant.

Understanding the Interaction Between Colorado’s Social Security Subtraction and the Pension & Annuity Subtraction

• In Colorado, taxpayers are allowed to subtract certain types of retirement income—including Social Security, pensions, and annuities—from their Colorado taxable income.
• But there’s a combined limit you need to be aware of.

What’s the Limit?

• For taxpayers under age 65, Colorado allows a maximum subtraction of $20,000 per person from taxable income for qualified retirement income.
• This $20,000 limit includes both: Social Security benefits that were taxed federally, and Pension and annuity income

How the Interaction Works (with Examples)

• When you subtract Social Security income, it reduces the amount you can subtract for pensions and annuities. Let’s look at a few examples to clarify:

Example 1: Social Security Subtraction Only

• Jane, age 60, qualifies under the new law.
• Her federal AGI is $60,000, and she receives $18,000 in taxable Social Security income.
• She has no pension or annuity income.

Result:
Jane can subtract the full $18,000 in Social Security from her Colorado income.
She doesn’t use the pension/annuity subtraction at all.

Example 2: Both Social Security & Pension Income

• Mike, age 62, has:
  • $15,000 in federally taxable Social Security,
  • $10,000 in pension income.

Result:
Mike can subtract up to $20,000 total.
Since he subtracts $15,000 for Social Security, he can only subtract $5,000 of his pension income.

Example 3: Over-Subtraction Warning

• Sarah, age 63, has:
  • $22,000 in federally taxable Social Security,
  • $5,000 in pension income.

Result:
She can only subtract $20,000 total—not the full $27,000.
If she claims all $22,000 of Social Security, she cannot subtract any pension income.

Important Note for Ages 65 and Older

If you’re 65 or older, the rules differ:

• You’re allowed to subtract all federally taxed Social Security, and
• You can subtract up to $24,000 per person in other retirement income (pensions, annuities, etc.)

So, this interaction rule about the $20,000 cap applies mainly to those under 65.

Bottom Line

• If you’re under age 65, your total subtraction for Social Security + pension + annuity income is capped at $20,000.
• Subtracting more Social Security income means subtracting less pension/annuity income—and vice versa.

So be strategic! If you have both types of income, you (or your tax preparer) should calculate how to maximize your subtraction based on your mix of income types.

For more information on Colorado Expands Social Security Tax Relief for Ages 55–64: What You Need to Know, contact me today.