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Taxes
on PERA Benefits
Colorado PERA benefits are subject to
federal income tax. The taxable amount of the benefit will depend upon the tax-paid plus tax-deferred balances in the member contribution account at retirement.
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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.
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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.
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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. This calculation offers most
retirees the advantage of receiving a greater portion of the benefit as
"tax-free" in earlier years. For more about the "Simplified
Method," contact the IRS for a copy of Publication 575, Pension and
Annuity Income. Please review the
Taxes on PERA Benefits brochure
for detailed information.
For more information, contact the IRS via their Web site at
www.irs.gov or by telephone at
1-800-829-1040.
Disability Retirement
If a retiree receives a disability retirement benefit, the entire
benefit is taxable until the retiree reaches "minimum retirement age." PERA uses
the age at which a member 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 a member made contributions
prior to July 1, 1984, under the PERA benefit structure, or made contributions prior to January 1, 1986, under the DPS benefits 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 the
retiree's "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.
Survivor Benefits
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 State Trooper
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 documentation to demonstrate qualification for this exemption.
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 both PERA and DPS benefit structure benefits, 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.
PERA sends information and forms on federal and state income tax
withholding to members applying for retirement.
For more information, contact the Colorado Department of Revenue via
their Web site at
www.colorado.gov/revenue/tax or by telephone at 303-238-7378.
1099-Rs
Each January, PERA mails 1099-Rs to those individuals receiving a PERA
benefit. Our Understanding Your 1099-R overview can help you to better
understand the information on your 1099-R.
Changing Your Tax Withholding
If you need to change the federal or state withholding amounts deducted
from your monthly benefit, you can complete a
Withholding Preference Form
(located in the Taxes on PERA Benefits brochure) or if you have a PERA PIN,
you may complete the
Withholding Preference Form online.
View,
print or
order the
Taxes on
PERA Benefits brochure for additional information.
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