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 Safety Officer 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.
Each January, PERA mails 1099-Rs to those individuals receiving a PERA benefit.Understanding Your Colorado PERA 1099-R fact sheet
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.
Changing Your Tax Withholding
If you need to change the federal withholding amount deducted from your monthly benefit, complete a Form W-4P through your secure account or you can download the form with the Taxes on PERA Benefits booklet below.Taxes on PERA Benefits booklet
2023 Federal Tax Withholding Changes
The IRS released a revised Form W-4P (Withholding Certificate for Periodic Pension or Annuity Payments) and a new Form W-4R (Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions). Form W-4P applies to PERA retirees and benefit recipients who receive ongoing PERA benefit payments; Form W-4R applies to anyone receiving a lump-sum distribution of their PERA account or as a named beneficiary of a deceased PERA member’s account. These forms will be used for requesting or electing any federal tax withholding changes beginning in 2023. The PERA Withholding Preference Form will no longer be accepted after December 15, 2022.
PERA retirees and benefit recipients who are currently receiving ongoing PERA benefit payments and who do not wish to make changes to their federal tax withholding elections are not required to file a new form, but PERA recommends that you complete the new Form W-4P for 2023 to ensure you have the appropriate tax amount withheld.
Please note that PERA cannot provide tax advice, including advice about how to complete these forms. If you have questions about your particular situation, please contact a tax or legal advisor.
The IRS made changes to withholding and issued new forms for retirement plans to use. The primary change is that there are now two forms: the W-4P for ongoing payments and the W-4R for single or lump-sum distribution payments. The W-4P form no longer allows tax filers to adjust their withholdings by electing a specific number of withholding allowances. Instead, the W-4P form has new input fields for increasing or decreasing the amount to withhold, including fields for tax credits and deductions. The W-4R form simply provides an opportunity to change the withholding percentage from the default withholding to a different withholding percentage, as well as allows for an additional fixed dollar amount over and above the calcualted tax percentage, if necessary.
No, if you are receiving ongoing PERA benefit payments and don’t wish to change your withholding elections, you are not required to submit a new tax withholding election form (W-4P). PERA will continue to withhold federal income tax from your benefit payments based on the elections we have on file. However, in order to ensure you have the appropriate tax amount withheld, PERA recommends that you complete this new form in 2023. This is especially true for those benefit recipients who elected a flat dollar or flat percentage to be withheld in place of the current tax tables.
If you make no changes to your federal tax withholding elections, PERA will use the IRS method to bridge your tax table elections over to the new methodology as of January 1, 2023. This bridging, in most cases, will adjust your withholding accordingly. If your current election is to withhold zero federal tax, a flat dollar amount tax or flat percentage tax, those elections will remain the same, but may be incorrect withholding amounts under the new IRS guidelines, which is why PERA recommends submitting the new Form W-4P for 2023.
Log in to your PERA account and select the “Forms” menu. From there, select the “Tax Withholding” menu which will take you to the electronic form and follow the prompts to complete and submit. If you have multiple accounts with PERA, you will need to select each account separately from the "Account Select" drop-down menu to make the changes for each.
Summary of Changes for IRS Form W-4P
- You will now select one of the following marital status options:
- Single or Married filing separately
- Married filing jointly or Qualifying surviving spouse
- Head of household
- Reflects income from multiple jobs/pensions/annuities
- Claim dependent and other credits
- Default withholding is now Single with no adjustments (changed from Married with three (3) allowances)