It’s important to have a grasp on both federal income tax laws and the tax laws that apply in your state. Having a thorough understanding of these laws can allow you to avoid serious legal or financial trouble. Colorado’s tax laws are simple and straightforward but there are several state tax guidelines you should understand if you reside in the region. Reviewing the specifics of these laws can make it easier for you to file your taxes correctly at the end of the year.
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Colorado State Income Tax
To simplify taxes for its residents, Colorado enacted a flat tax rate in 1987. This rate fluctuated over the years, but the state income tax rate is currently 4.63%. This means when you pay your individual income taxes, you’ll owe 4.63% of all eligible taxed income to the state of Colorado, minus any tax credits you may be eligible to claim.
Certain cities in Colorado charge additional taxes on compensation. These taxes are also flat rates, so they’re easy to calculate and based on the compensation that you earned. You must pay these city-specific taxes in addition to your individual state income taxes if you reside in one of these cities:
- Aurora: You must pay the city $2 per month if you earned more than $250.
- Denver: You must pay the city $5.75 per month is you earned more than $500.
- Greenwood Village: You must pay the city $4 per month if you earned more than $250.
If you resided in one of these cities and earned compensation above the threshold, you must calculate the taxes you owe for the year and pay them to the city.
Colorado Sales Tax
Colorado also carries a state sales tax of 2.9% on retail sales conducted within the state. The retail sales tax is charged during the sales transaction. For example, if you bought goods that cost $10, the sales tax would be an extra .29 cents. The total you owe for the goods would be $10.29.
There are certain areas that charge an additional percentage for sales tax. For example, Gunnison Valley includes an additional 1% tax on retail sales.You can use the Colorado Department of Revenue taxes website to look up the retail sales tax in your area.
The retail sales tax only applies to goods that you purchase, not services. There are other exemptions to this sales tax, including:
- Food for home consumption.
- Gas, electricity, or other utilities for home use.
- Farm equipment.
- Machinery and machine tools.
- Manufactured homes.
- Property used in space flights.
- Renewable energy components.
- School-related sales.
- Beetle wood products.
- Biogas production system components.
- Food sold in vending machines.
- Low-emitting vehicles that are over 10,000 pounds.
- Occasional sales by charitable organizations.
The sale of retail marijuana and retail marijuana products is not subject to the 2.9% retail sales tax. However, these products are subject to a Retail Marijuana Sales Tax (RMS) of 15%.
Colorado Property Taxes
Real estate is taxable in Colorado and the amount you owe depends on your property’s value. A county assessor determines your property’s value by analyzing the home’s features, square footage, and quality. The assessor also reviews current market conditions, comparable property sales in the area, and neighboring property values to determine the specific value of your property.
You’re responsible for paying a percentage of your home’s value, called the property tax rate. This tax rate varies, depending on the county you live in. This rate is determined by the area’s mill levy. This number is calculated by taking the total revenue the taxing authority determines it needs from property taxes and dividing it by the total assessed value of properties within the area. Each county in Colorado sets its own property tax rate.
There are property tax exemption programs for property owners who meet certain qualifications. The Property Tax Exemption Program for Seniors and Disabled Veterans exempts qualifying participants from paying 50% of the first $200,000 in value of their primary residence.
The Property Tax/Rent/Heat Credit (PTC) rebate is available to Colorado residents who meet program eligibility guidelines. Applicants must prove they are Colorado residents and either low-income residents, seniors, and/or disabled individuals to receive tax rebates. The rebate applies to rent, property taxes, or heating expenses these residents paid throughout the year.
Residents can apply for the PTC rebate through the Colorado Department of Revenue. The amount of the rebate provided to each eligible applicant varies depending on the household’s characteristics.
Colorado Estate Taxes
An estate tax is a financial levy placed on an estate based on the current value of its assets. When an estate holder passes away and the estate is transferred to a new owner, the inheritor may be required to pay a federal estate tax on the assets.
Colorado used to charge an estate tax when this ownership was transferred, but as of 2004, this state estate tax no longer exists. Decedents whose date of death was on or after January 1, 2005 do not owe state estate taxes on their assets. If the date of death for the estate holder is prior to January 1, 2005 and a Form 706 or 706NA (U.S. Estate Tax Return) is filed, Form DR 1210 (Colorado Estate Tax Return) must be filed with the Colorado Department of Revenue. The estate tax owed is based on the state death tax credit on the federal return.
Fiduciary Income Tax
If you are responsible for overseeing a trust or estate, you’re considered its fiduciary. Since estates can earn income, you may owe a fiduciary income tax to the state of Colorado.
If you’re named on the trust as the fiduciary and the trust earns income, you must first file your federal return, Form 1041 (U.S. Income Tax Return for Estates and Trusts). Then, you must file your state fiduciary income tax return, Form DR 0105 (Fiduciary Income Tax Return), with the Colorado Department of Revenue. The fiduciary income tax rate in Colorado is the same as its state income tax rate, which is a flat 4.63%.
Tips for Filing Taxes in Colorado
State tax returns are due on the same date as federal tax returns: April 15. You can prepare both your federal and state income tax returns at the same time. You’ll need to gather several pieces of information when you prepare to file your taxes, including proof of the income you earned, estates or property you own or manage, and receipts or documentation on tax credits you may qualify for. To ensure you’re completing the proper forms for state taxes, use the Colorado Department of Revenue as a resource.
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