Colorado PERA benefits are subject to federal income tax, as well as applicable state and local taxes. The taxable amount of the benefit will depend upon the tax-paid and tax-deferred balances in the member contribution account at retirement.
- Under the PERA benefit structure, the tax-paid balance in the member contribution account is based on member contributions made before July 1, 1984, and any tax-paid money used to purchase service credit.
- Under the DPS benefit structure, the tax-paid balance in the member contribution account is based on the member contributions made before January 1, 1986, and any tax-paid money used to purchase service credit.
Since these amounts were already taxed, they reduce the taxable portion of the benefit.
PERA uses the Internal Revenue Service’s “Simplified Method” to calculate the tax-free (nontaxable) portion of a benefit. For more about the “Simplified Method,” contact the IRS for a copy of Publication 575, Pension and Annuity Income.
If you receive a disability retirement benefit, the entire benefit is taxable until you reach “minimum retirement age.” PERA uses the age at which you would first be eligible for reduced service retirement as “minimum retirement age.” For most disability retirees, service credit is projected to 20 years, thus minimum retirement age is 55.
If you made contributions prior to July 1, 1984, under the PERA benefit structure, or prior to January 1, 1986, under the DPS benefit structure, and/or purchased service credit with after-tax money, the “Simplified Method” of calculation for determining the tax-free portion of the benefit becomes effective at your “minimum retirement age.”
A retiree who is under age 65 and totally disabled may be eligible for a special federal income tax credit. Contact the IRS and get a copy of Schedule R and Publication 524, Credit for the Elderly or the Disabled.
For a surviving spouse who receives a benefit, PERA calculates the tax-free portion of the benefit, if any, using the “Simplified Method” for cost recovery. For a child’s survivor benefit, a tax adviser would calculate cost recovery, if any, under the IRS’s “General Rule.”
Surviving spouses and qualified children who receive survivor benefits based upon the death of a State Trooper who was killed in the line of duty may be exempt from federal income tax. Contact a tax adviser or the IRS for more information about qualification for tax exemption under section 101(h) of the Internal Revenue Code. Surviving spouses and qualified children who qualify for this exemption should contact PERA so that withholding and tax reporting can be adjusted. PERA may require appropriate documentation.
Retired Public Safety Officers
The Pension Protection Act of 2006 permits eligible retired public safety officers to exclude up to $3,000 of their qualified health insurance premiums from their gross federal taxable income each year, as long as the premiums are deducted from their retirement benefits. The IRS Form 1099-R that is sent to the retiree or benefit recipient does not reflect this exclusion. PERA encourages the retiree or benefit recipient to consult with a tax adviser or the IRS with questions about this deduction.
Colorado Income Tax
PERA can withhold Colorado state income tax if requested. PERA does not withhold taxes for any other state.
Colorado law excludes from Colorado state income tax total pension income up to $20,000 per year per person for those retirees age 55 through 64, or $24,000 for those retirees age 65 and over. The retiree’s age on December 31 is used to determine the exclusion amount for that year. Pension income includes a PERA retirement benefit, Social Security payments, certain other retirement pensions, and distributions from Individual Retirement Accounts and tax-deferred savings plans. Persons receiving a survivor benefit, regardless of age, also qualify for this pension exclusion.
Each January, PERA mails 1099-Rs to those individuals receiving a PERA benefit. The Understanding Your 1099-R overview can help you to better understand the information on your 1099-R.
Changing Your Tax Withholding
If you need to change the federal or state withholding amounts deducted from your monthly benefit, complete a Withholding Preference Form (located in the Taxes on PERA Benefits brochure) or if you have a User ID and password, you may complete the form online.