Income Tax Deduction For Mil Retirement Benefits

The starting point for determining state income tax liability is federal taxable income. This number is adjusted for additions and subtractions (deductions) that are used to determine Colorado taxable income, which amount is multiplied by the state's income tax rate.

Income earned from pensions or annuities, including military retirement benefits, can be considered income for purposes of the state's income tax. In Colorado, current law provides an income tax deduction that subtracts from federal taxable income amounts received from pensions or annuities for individuals who are 55 years or older. For individuals who are 55 to 64, that benefit is capped at $20,000 per income tax year. For individuals who are 65 or older, that benefit is capped at $24,000 per income tax year. This existing benefit applies to pensions or annuities received, among other things, from service in the uniformed services of the United States. The bill does not change this current tax benefit.

In 2018, the general assembly enacted a separate temporary income tax deduction through the income tax year commencing on or after January 1, 2023, that subtracts from federal taxable income amounts received from military retirement benefits for individuals who are under 55 years old. This additional deduction for military retirements benefits is currently capped as follows:

• $7,500 for the income tax year commencing on or after January 1, 2020, but before January 1, 2021;
• $10,000 for the income tax year commencing on or after January 1, 2021, but before January 1, 2022; and
• $15,000 for income tax years commencing on or after January 1, 2022, but before January 1, 2024.

The bill makes modifications to the existing tax deduction for military retirement benefits for individuals who are under 55 years old by:

• Extending the number of years the temporary income tax deduction is available by 10 years; and
• Increasing the maximum benefit to $20,000 for income tax years commencing January 1, 2023, and for each income tax year thereafter.
  (Note: This summary applies to this bill as introduced.)