Colorado State Tax Exemptions for Retirees

Erik:                                     00:00                    You're listening to Uncommon Cents, a podcast by Bowman Financial Strategies. I'm your host, Erik Bowman and thank you for joining me today. Hi everyone. This is Erik Bowman, your host for Uncommon Cents and today we're going to be talking about the Colorado retirement income tax exemptions. Before I get into the details of these specific exemptions that can help lower your Colorado state taxes, it is important to note that before you make any assumptions or attempt to take any of these exemptions, I highly recommend that you get with an accountant to understand how these are going to actually impact your taxes and to ensure that you're following current state law. The primary topics we're going to cover today are what is the exemption and what type of income qualifies for the exemption, who does it apply to, and what are some of the planning opportunities that may make sense for you if you're in retirement and currently taking some type of retirement income?

Erik:                                     01:07                    First, if you meet certain qualifications, you may be able to deduct or subtract some or all of your qualified retirement income on your Colorado individual income tax return. For these purposes, Colorado determines retirement income and defines it as annuity or pension income, IRA distributions, portions of your social security income as well as Roth conversions. All of these potentially apply for this exemption. In addition, if you derive retirement income from the Colorado public employee retirement association, commonly known as Colorado Para, or if you receive a pension from the Denver public school retirement system, you may be able to claim those as well. So first things first, who can actually claim this exemption? Well, you may be able to claim the exemption if you received qualifying retirement income and you meet the following criteria. First, you have to have been at least 55 years old or older at the end of the tax year that you're wishing to claim the exemption.

Erik:                                     02:17                    Or, you should have received the qualifying pension or annuity income as a beneficiary because of the death of a person who earned the pension or annuity. One of those two are the minimum requirements. Let's talk a little bit more about the type of income that is potentially exempt. As I mentioned, annuity income can be exempt. A Colorado Pera pension may be exempt as well, and so our distributions from your traditional Ira and what we're talking about here are the taxable distributions from a traditional Ira, not the distributions from a Roth Ira or a non-qualified account. In addition, portions, social security income may be exempt. We do need to remember though that all of your social security income is not necessarily taxable at the federal level, and in order to qualify for the state exemption, the social security income must be taxable at the federal level, so that's going to require a little bit of accounting help to make sure that you're accurate in that respect. Roth conversion income is exempt as a part of this rule as well. That's very important because as a financial strategy, Roth conversions may be a very valuable tool to save income taxes over the life time of retirement.

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