Colorado Military Retirement Income Subtraction

Colorado taxes income at a flat 4.4 percent and does not exempt military retired pay. It offers two subtractions instead, and which one applies turns entirely on age at the end of the tax year. A retired service member under 55 may claim the military retirement subtraction on the Subtractions from Income Schedule, form DR 0104AD, for up to $15,000 of military retirement benefits included in federal taxable income. The Department of Revenue publishes the cap by year: $4,500 for 2019, $7,500 for 2020, $10,000 for 2021, and $15,000 for 2022 through 2028. Unlike many state figures this one is legislated out several years, so it can be relied on rather than looked up each spring. At 55 or older the military subtraction stops and the retiree uses Colorado's general pension and annuity subtraction, which is $20,000 for ages 55 through 64 and $24,000 at 65 and older. Two bills to lift those caps, SB25-136 and HB26-1062, were both postponed indefinitely in committee, so the figures are unchanged for 2026. The practical point of the under-55 provision is that it fills a gap. Colorado's general pension subtraction begins at 55, which does nothing for the typical 20-year retiree who leaves service in their early forties. The military subtraction is what that retiree gets, and $15,000 at 4.4 percent is worth about $660 a year. Watch the transition at 55 rather than assuming it is an increase. It is a jump from a $15,000 cap to a $20,000 cap, but it is also a move onto a subtraction that all pension income shares. A retiree drawing both military retired pay and a civilian pension can subtract $15,000 of the military pay alone at 54 and only $20,000 across both at 55. Survivor Benefit Plan payments use the general pension subtraction: $20,000 under 65 and $24,000 at 65 and older. Social Security interacts with the same cap. Beginning in tax year 2025 a taxpayer aged 55 to 64 may fully subtract Social Security benefits if adjusted gross income is under $75,000 filing single or $95,000 filing jointly, and at 65 and older the subtraction is full without an income test. A Social Security subtraction reduces what is left of the pension and annuity cap for other retirement income. Several provisions help those still serving. Active duty pay of a Colorado resident who spends at least 305 days of the tax year stationed outside the 50 states lets that member, and an accompanying spouse, file as a nonresident. A member whose home of record is Colorado but whose legal residence moved elsewhere may reacquire Colorado residency by registering to vote, buying residential property, titling and registering a vehicle, notifying the prior state, or executing a new will naming Colorado, and may then subtract active duty compensation received after reacquisition. A nonresident spouse who came to Colorado only to accompany a member on orders may exclude Colorado wages and tips, filing form DR 0104PN and giving the employer a DR 1059. VA disability compensation and Dependency and Indemnity Compensation never enter federal taxable income and so are outside Colorado's base entirely. Combat zone pay follows the federal exclusion, and Colorado also allows a filing and payment postponement until 180 days after the assignment ends.