If another state already taxed my Social Security or annuity contributions, does Colorado give a subtraction or credit when those benefits are later taxed on my Colorado return?

Plain-English summary

The Department was asked whether Colorado gives a resident a subtraction or a credit for Social Security benefits or annuity distributions that land in their federal taxable income, when the contributions behind those benefits were already taxed by another state. The short answer: there is no special Colorado break aimed at that situation.

Colorado taxes a resident on federal taxable income, so whatever Social Security or annuity income is in your federal return flows onto your Colorado return. Two existing provisions can lower the bill, but neither is triggered by "another state already taxed the contributions":

• Pension and annuity subtraction (§ 39-22-104(4)(f)). You may subtract pension/annuity amounts that are in federal taxable income, capped at $20,000 per year if you are 55–64 and $24,000 per year if you are 65 or older. For tax years beginning on or after January 1, 2022, the 65+ cap can rise to the full amount of Social Security income in federal taxable income when that amount exceeds $24,000.
• Credit for taxes paid to another state (§ 39-22-108). A resident can credit taxes another state charged on income from sources in that state — but only in the year the other state's tax accrued. The Department quotes Rule 39-22-108(3)(b): if you became a Colorado resident in a later year than the year the other state's tax accrued, you cannot claim the credit (its example involves an I.R.C. § 1031 exchange taxed by the home state one year, with the Colorado sale the next).

So if another state taxed the contributions years before you moved to Colorado and started drawing the benefits, the other-state credit won't line up in time, and there is no separate subtraction for that earlier exposure. This is a General Information Letter — general guidance, not binding on the Department.

What this means for you

Retirees who moved to Colorado from another state

Don't expect a Colorado credit or subtraction simply because the state you came from already taxed the money you put in. Your relief is the age-based pension/annuity subtraction (capped, but larger for the 65+ group from 2022 on), and the other-state credit only helps if the other state's tax and your Colorado tax fall in the same year — which is rarely the case for contributions taxed years earlier.

Individuals receiving annuity income

Annuity payments are generally in federal gross income (26 U.S.C. § 61(a)(8)) and therefore in your Colorado base. The pension/annuity subtraction can shelter part of it within the age caps; amounts above the cap remain taxable.

Accountants and tax professionals

Watch the timing rule in § 39-22-108(4) and Rule 39-22-108(3)(b): the credit for taxes paid to another state must be taken in the year the other state's tax accrued, so a residency change between the accrual year and the Colorado-tax year defeats it. Also note the 2022 enhancement to § 39-22-104(4)(f)(III)(B) that lets the 65+ subtraction reach the full Social Security amount.

Common questions

Q: Does Colorado give me a break because another state already taxed my Social Security or annuity contributions?
A: Not a special one. Colorado offers the general pension/annuity subtraction and the credit for taxes paid to another state, but neither exists specifically to relieve contributions an earlier state taxed.

Q: How much pension or annuity income can I subtract?
A: Up to $20,000 a year if you are 55–64, or $24,000 if you are 65 or older. For tax years beginning on or after January 1, 2022, the 65+ limit can rise to your full Social Security amount when it exceeds $24,000.

Q: Can I credit the tax the other state charged?
A: Only if that tax accrued in the same year you are claiming the Colorado credit. If you became a Colorado resident after the year the other state's tax accrued, the credit isn't available.

Q: Can I rely on this letter?
A: No. It's a General Information Letter — general guidance only, not binding on the Department. A binding answer requires a private letter ruling.

Citations and references

Statutes and rules:
- § 39-22-103(8), C.R.S. (Colorado resident individual)
- § 39-22-104(1.7)(b), C.R.S. (income tax on federal taxable income)
- § 39-22-104(4)(f), C.R.S. (pension/annuity subtraction; $20,000 / $24,000 caps; (4)(f)(III)(B) increased 65+ cap)
- § 39-22-108(1), (4), C.R.S. (credit for taxes paid to another state; accrual-year limit)
- 1 CCR 201-2, Rule 39-22-108(3)(b) (tax-year accrual example)
- 26 U.S.C. § 61(a)(8); IRS Publication 915 (federal treatment of annuity and Social Security income)

Source

• Landing page: https://tax.colorado.gov/all-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-22-001.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

GIL 22-001
March 16, 2022
XXXXXXXXXXXXX
Via Electronic Mail: XXXXXXXXXXXXXXX
Re: Request for general information letter regarding social security benefits or annuity
distributions.
Dear XXXXXXXXX:
You submitted a request for a general information letter regarding Colorado income tax imposed
on social security benefits or annuity distributions included in federal taxable income if the social
security and annuity contributions were previously taxed in another state. The Colorado
Department of Revenue (“Department”) issues general information letters and private letter
rulings. A general information letter provides a general overview of the relevant tax issues, but is
not binding on the Department. A private letter ruling provides a specific determination for a
specific set of facts, is binding on the Department, and requires payment of a fee. For more
information about general information letters and private letter rulings, please see 1 CCR 201-1,
Rule 24-35-103.5.
Issue
Whether Colorado allows a subtraction or credit with respect to social security benefits or
annuity distributions included in the federal taxable income of a Colorado resident if the social
security and annuity contributions were previously taxed by another state.
Discussion
Colorado imposes income tax on a full or part-year Colorado resident individual’s federal
taxable income.1 Generally speaking, payments from a qualified annuity are included in federal
gross income unless certain specific rules apply.2 Special federal income tax rules apply to
determine when social security benefits are included in an individual’s federal taxable income.3
To the extent that annuity and social security income is included in an individual’s federal
taxable income, that income would then be included in the federal taxable income of a Colorado

1 Sections 39-22-103(8) and 39-22-104(1.7)(b), C.R.S.
2 26 U.S.C. § 61(a)(8).
3 See Internal Revenue Service Publication 915, which explains the federal income tax rules for social security

benefits. https://www.irs.gov/publications/p915

GIL 22-001
March 16, 2022
Page 2
resident.4 The Colorado tax liability could be reduced by application of a state subtraction or
credit, if applicable.5
Colorado allows a subtraction from federal taxable income, and thus a resulting reduction in
Colorado taxable income, for amounts received as pensions or annuities by any individual, to
the extent those amounts are included in federal taxable income.6 The subtraction is limited to
$20,000 per tax year for taxpayers aged 55 to 64 years, or limited to $24,000 per tax year for
taxpayers aged 65 years or older.7 For income tax years starting on or after January 1, 2022,
the limitation for taxpayers aged 65 years or older can be increased to the amount of social
security income included in federal taxable income if the amount of social security income
exceeds the $24,000 limitation.8
After all required additions and subtractions are made, such as the limited subtraction for
pension and annuity income, the state’s income tax rate is applied to the resulting Colorado
taxable income.9 Various credits are set forth in article 22, title 39, C.R.S., which reduce, on a
dollar-for-dollar basis, the amount of the individual income tax imposed.
With certain limitations, Colorado allows a credit against the Colorado income tax imposed for
the amount of taxes on federal taxable income accrued to another state on income derived by a
resident individual from sources in another state.10 However, the credits must be taken in the
year in which the taxes of the other state accrue.11 Rule 39-22-108(3)(b)12 elaborates with an
example:
“Tax Year. Credit for tax reported to another State is not permitted if the other State’s tax
accrued in a tax year different than the tax year against which the Colorado credit is
claimed. For example, taxpayer, while a resident of another state, makes an I.R.C. §
1031 exchange of property located in the taxpayer’s home state for property located in
Colorado. The other state requires taxpayer to recognize for that state’s income tax the
gain at the time of such exchange. In the following year, taxpayer becomes a resident of
Colorado and sells the Colorado property. Colorado income tax arising from the sale of
the Colorado property cannot be offset by a credit for tax reported in the prior year in the
other state. See, §39-22-108(4), C.R.S. . . .”
Thus, if an individual taxpayer becomes a Colorado resident in a tax year that is after the tax
year when the tax accrued in another state, then the taxpayer may not claim the credit for the
tax paid in the other state.

4 See section 39-22-104(1.7)(b), C.R.S. (imposing the state’s income tax on federal taxable income as determined

pursuant to section 63 of the Internal Revenue Code).
5 See, e.g., section 39-22-104(2) and (4), C.R.S. (prescribing various amounts to be subtracted from federal taxable
income prior to the application of the state income tax rate); section 39-22-108, C.R.S. (allowing a credit against the
state tax for certain taxes paid to other states).
6 Section 39-22-104(4)(f), C.R.S.
7 Id.
8 Id. at (4)(f)(III)(B).
9 Section 39-22-104(1.7)(b) and (2), C.R.S.
10 Section 39-22-108(1), C.R.S.
11 Section 39-22-108(4), C.R.S.
12 1 CCR 201-2, Rule 39-22-108.

GIL 22-001
March 16, 2022
Page 3

Miscellaneous
This letter represents the good faith opinion of Department personnel who are knowledgeable
on state taxes issues. However, the Department does not make a specific determination on any
of the issues raised and the Department is not bound by this general information letter.
Thank you for your request.
Sincerely,
Office of Tax Policy
Colorado Department of Revenue