Colorado PERA reports the taxable amount of your retirement benefit to the IRS on Form 1099-R. That taxable amount may be different, depending on which benefit structure you retired from — PERA or Denver Public Schools (DPS). The following are answers to some frequently asked questions about how federal and state income tax rules affect your benefit.
How much of my benefit will be subject to federal income tax in the PERA benefit structure?
Unless your account includes after-tax contributions, which are explained below, your entire benefit is reported as taxable income.
How are federal income taxes different in the DPS benefit structure?
Your retirement date may determine the taxable portion of your benefit. If you retired:
- Before July 1, 1986, and used the Three-Year Recovery Rule, your entire benefit each year is taxable.
- Before January 1, 1987, and did not use the Three-Year Recovery Rule, a fixed portion of your annual benefit is tax-free for your lifetime.
- After 1986, benefits you receive after you recover your tax-paid contributions are fully taxable.
- Before January 1, 1991, the taxable portion of your benefit was not calculated by DPSRS.
- On January 1, 1991 or later, the taxable portion of your benefit was calculated using the Simplified General Rule. It is possible that there was not enough information to calculate the taxable portion, in which case your 1099-R will state, “Taxable amount not determined.”
What portion of my account might qualify as after-tax contributions on which I do not pay taxes?
You will not pay taxes on the following:
- PERA contributions made before July 1, 1984, in the PERA benefit structure.
- DPSRS contributions made before January 1, 1986, in the DPS benefit structure.
- After-tax dollars used to purchase service credit.
For more information, review the Colorado Department of Revenue’s FYI Income 16: Subtraction from Income for Recipients of PERA or Denver Public Schools Retirement Benefits at tax.colorado.gov/sites/tax/ files/Income%2016.pdf.
What portion of my benefit is subject to Colorado state
Your benefit is subject to state income tax once it exceeds a designated exclusion amount. Colorado residents age 55 through 64 (by December 31) can exclude up to $20,000 of pension income each year, including PERA benefits. For Colorado residents who are age 65 and older, the first $24,000 of an annual pension benefit is excluded from state taxes. For more information, review the Colorado Department of Revenue’s FYI Income 25: Pension and Annuity Subtraction at tax.colorado.gov/sites/tax/files/2020.02_Income25.pdf.
I don’t live in Colorado, will PERA withhold income taxes for my state?
No, PERA only withholds state income taxes for Colorado. Check with your state’s revenue agency about any state income taxes you may owe.
What is my current federal withholding?
Your December PERA benefit statement includes your current federal withholding status. If you did not provide withholding instructions, PERA is required to withhold federal income tax at the same rate for a married individual claiming three exemptions if your gross taxable monthly benefit was $2,096 or more in 2021. Even if PERA did not withhold taxes for you, you still may owe income tax and should complete the appropriate federal tax forms.
- Read the Taxes on PERA Benefits booklet (also available by calling PERA) and use the “Benefit Tax Estimate” calculator to help make sure your tax withholding is appropriate.
- Make changes to your federal or Colorado state withholding online by logging in to your PERA account with your User ID and password. You can also make changes using the Withholding Preference Form in the Taxes on PERA Benefits booklet.
- Contact the Colorado Department of Revenue (303-238-7378 or tax.colorado.gov) or consult with a tax professional if you have specific questions regarding your state taxes.
- Review IRS Schedule R and Publication 524 if you are under age 65 and totally disabled—you may be eligible for a special federal income tax credit.
Have You Moved Out of Colorado?
You should instruct PERA to stop withholding any previously requested Colorado state income tax by completing a new Withholding Preference Form.
This article is not intended as tax advice and specific questions about your taxes should be directed to the IRS, the Colorado Department of Revenue, or your personal tax consultant.