Colorado State Income Tax: Key Insights and Filing Tips 2023

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In the rush of everyday life, tax season can sometimes sneak up on you. With the extended filing deadline just around the corner (on October 16), now is the perfect time to brush up on Colorado’s state income tax nuances and check if you might owe taxes in the state and need to file a return.

Do You Owe Colorado State Income Tax?

Colorado enforces an income tax on all individuals residing within the state, regardless of their residency status. So, if you are a Colorado resident, you will be liable to pay income tax.

Importantly, this tax may also apply to people who don’t live in Colorado if they have earned any income from sources in Colorado. If an individual is a Colorado resident for only a portion of the year, they are subject to Colorado tax on both the income earned during their residency and any income generated from Colorado-based sources.

But remember: If you’re a Colorado resident, your individual income in its entirety will be subject to Colorado income tax, regardless of whether the income was derived from sources inside or outside of Colorado.

Are You a Colorado Resident?

You are a Colorado resident if:

  • You have established your domicile (the place you consider “home” and intend to return to when you are away) in Colorado.
  • You have a permanent residence in Colorado and spend a total of over six months in the state during the tax year.

Residents must file Form DR 0104.

It is important to note that residency can be established in more than one way.

Statutory residents

Even if you’re not domiciled in Colorado, you will still be considered a resident for the purpose of income tax if:

  • You maintain a permanent place of abode in Colorado.
  • You spend, in aggregate, more than six months of the tax year in Colorado.

If you change your domicile during the tax year by moving into or out of Colorado during the tax year, you are not a statutory resident even if you spent more than 6 months living in Colorado. Instead, you’d be considered a “part-year” resident (covered next).

Part-year residents

Generally, you will be considered a part-year Colorado resident if:

  • You were domiciled in Colorado at the beginning of the tax year, but then left your Colorado domicile during the tax year.
  • You were domiciled outside of Colorado at the beginning of the tax year, but then moved to Colorado during the tax year and established domicile in the state.

Note: At any given point, a person can have just one domicile.

Part-year residents are considered Colorado residents for the period they are domiciled in the state and nonresidents for the period they are domiciled outside the state.

They must file Form DR 0104 and corresponding schedule DR 0104PN.

Nonresidents

If you are not a Colorado resident at any time during the tax year, it stands to reason that you will be considered a nonresident. But if you derived any income from Colorado sources during the tax year, you may incur a liability to pay income tax.

Nonresidents file Form DR 0104. They use Form 0104PN to calculate Colorado tax liability.

What Is the Income Tax Rate in Colorado?

As of the 2022 tax year (for which you filed/will file returns in 2023), the new rate stands at 4.40%. This is a flat income tax rate.

A flat tax is a system where all taxpayers, regardless of their income level, are subject to a uniform tax rate - which means that Colorado diverges from the approach employed by the federal government and numerous other states. The federal government employs a system where different income segments are subject to increasingly higher tax rates based on earnings.

Is It the Same as a Federal Return?

No, Colorado’s state income tax is separate from the federal income tax you pay - this applies to the returns as well. To calculate your federal income tax, you should begin by preparing your federal return. Afterward, you can proceed to fill out your Colorado return (your federal taxable income forms the basis of your Colorado income tax calculations).

Also, do note that the Colorado Department of Revenue does not require taxpayers to attach a copy of the federal return to their Colorado return.

How Is Colorado Income Tax Computed?

When computing Colorado income tax, you must modify your federal taxable income in accordance with Colorado state tax regulations. Here’s how Colorado calculates an individual’s taxable income:

Federal taxable income + State additions – State subtractions = Colorado taxable income

Based on the taxable income, here’s how to calculate how much you owe in income tax:

(Colorado taxable income x 4.4% tax rate) – Colorado tax credits = Net Colorado income tax

As you can see, Colorado income tax relies on federal taxable income as its basis. To compute Colorado income tax, a uniform tax rate of 4.4% is applied to the adjusted federal taxable income, accounting for both state-specific additions and subtractions. Following this calculation, Colorado income tax credits are deducted from the result to determine the net Colorado income tax, which is the amount payable by a Colorado taxpayer.

Additions

Certain income is exempt from federal income tax but subject to Colorado income tax. Consequently, this income must be added to federal taxable income for Colorado income tax purposes.

Additions are typically mandated for one of three reasons:

  • To subject specific types of income, which are exempt from federal taxation, to Colorado income tax
  • To eliminate or decrease a deduction permitted under federal law, but not under state law, effectively reintegrating the deducted amount (referred to as an “addback”)
  • To reclaim a previously applied subtraction

Here are a list of the major additions:

  • Any state income tax included in federal itemized deductions
  • From 2021 to 2025, any federal qualified business income deduction for taxpayers with income over $500,000 (if filing singly) or $1,000,000 (if filing jointly)
  • The amount of any charitable contribution taken as an IRS deduction that will be claimed as a gross conservation easement credit on the Colorado return
  • The amount of expenses for unauthorized alien labor services
  • Beginning in 2022, for taxpayers with adjusted gross income over $400,000, the amount by which federal itemized deduction exceeds $30,000 (if filing singly) or $60,000 (if filing jointly)

Subtractions

Certain forms of income are liable to federal income tax but are not subject to taxation in Colorado. A deduction is permitted for the following types of income, provided they are included within a taxpayer’s federal taxable income, to partially or entirely exempt them from Colorado taxation:

  • Some or all of the social security, pension, and annuity income included in one’s federal taxable income
  • Any interest or dividend income from US government obligations exempt from Colorado income tax
  • Certain qualifying capital gain income included in one’s federal taxable income (this can be claimed by qualifying taxpayers)
  • PERA (Public Employees’ Retirement Association) contributions made in 1984 through 1986 and/or Denver Public School retirements savings contributions made in 1986
  • To the extent not claimed as a deduction on the taxpayer’s federal tax return, the amount contributed to a Colorado medical savings account
  • Any refund of Colorado income included in federal taxable income
  • Up to $20,000 (if filing singly) or $30,000 (if filing jointly) in certain qualified state tuition programs
  • Qualifying charitable contributions
  • Costs incurred while performing wildfire mitigation measures

What If You Fail To Pay or File?

If you did not file your return by the original April deadline, you can rest easy (that is, until October 16). This is because the state grants you an automatic six-month extension to file your returns. Also, you needn’t fill out a form to avail this extension.

However, do not confuse more time to file with more time to pay owed taxes - the 6-month extension to file does not give you an extension to pay.

If you owe Colorado state income tax, you must ideally pay 90% of your tax liability by the April deadline. If you do that, any remaining balance due would be subject to interest only.

You can pay in either of the following ways:

If you paid at least 90% of your income tax liability by April 18, you have until October 16 to file your Colorado income tax return.

If you are expecting to get a refund this year, but did not file by the original filing deadline, you can still file your state income tax return on or before October 16.

Penalties

If you fail to pay your taxes by the applicable due date, interest and a penalty accrues on the unpaid amount until the taxes are paid.

Late payment penalty

The late payment penalty is the greater of five dollars or 5% of the unpaid tax, plus an additional 0.5% for each month the tax remains unpaid, to a maximum of 12%.

However, the penalty is waived if the following conditions are met:

  • You paid at least 90% of the tax due by the original due date, not including any extensions.
  • You filed a return by the extended due date.
  • You paid any tax balance reported on the return at the time of filing.

Filing Tips

Here are some tips for filing your 2022 income tax returns in Colorado:

  • Stay updated with tax law changes: Be aware of any changes in federal and state tax laws that might affect your filing status, deductions, or credits.
  • Gather necessary documents: Collect all relevant financial documents such as W-2s, 1099s, receipts, and records of any deductions or credits.
  • Consider electronic filing: E-filing is often faster, more secure, and can result in quicker refunds compared to paper filing.
  • Explore free filing options: Many online platforms offer free filing options for individuals who meet certain income thresholds.
  • Double-check personal information: Ensure all names, social security numbers, and other personal details are accurate and match your official documents.
  • Understand deductions and credits: Familiarize yourself with eligible deductions and credits to maximize your potential tax savings.
  • Check for Colorado-specific credits: Colorado offers certain state-specific credits that may apply to you.
  • Consider using tax software or a professional: Tax software can help guide you through the process, while a tax professional can provide expert advice and ensure accurate filing.
  • Be mindful of filing deadlines: Make sure to file your return and pay any owed taxes by the deadline to avoid penalties or interest.
  • Review before submitting: Carefully review your return for any errors or omissions before submitting it.
  • Keep copies of your return: Retain a copy of your filed return for your records, including all supporting documents.

Key Takeaways

  • The extended deadline for filing your Colorado state income tax returns for 2022 is October 16, 2023.
  • Both residents and nonresidents (under certain conditions) are subject to Colorado income tax.
  • Part-year residents are taxed based on their income during their residency period.
  • Statutory residents are also liable to pay Colorado income tax.
  • Colorado applies a flat tax rate of 4.4% to taxable income.
  • Colorado income tax is calculated by adjusting federal taxable income.
  • Additions are made for specific types of income subject to Colorado tax.
  • Subtractions are allowed for certain types of income to be exempt from Colorado tax.
  • Penalties are imposed for late payment, although they may be waived under specific conditions.

Conclusion

Navigating Colorado’s state income tax requires an understanding of residency classifications, deductions, credits, etc. Residents, nonresidents, and part-year residents all have specific tax obligations, with factors like domicile and duration of stay playing crucial roles. The flat tax rate of 4.4% applies to taxable income, and adjustments are made based on federal taxable income. It’s essential to be aware of both additions and subtractions when computing Colorado income tax. Remember, meeting filing deadlines and staying updated on tax laws are key.

Stay informed, file accurately, and keep your financial house in order to make tax season a breeze. With the October 16 deadline approaching, it’s time to act, ensuring you’re on the right side of Colorado’s tax laws and maximizing your financial well-being.