Colorado lawmakers finished a significant rewrite of the state’s tax code on Wednesday when Gov. Jared Polis signed two new laws.
“We’re delivering tax relief for the people of Colorado,” Polis said, calling it one of the most exciting days of his term as governor. “ … This goes a long way toward leveling that playing field, to make sure that there’s less special breaks and that we all pay a lower rate."
In the big picture, the laws will allow the state to collect roughly $415 million annually in new tax revenue from certain businesses and individuals. More than half of that money — about $230 million — will then be used to fund tax credits that are aimed to benefit small businesses and people with lower incomes.
It adds up to one of the biggest tax changes in more than a decade for Colorado, but none of the laws required voter approval because they don’t change the actual tax rates.
The laws, sponsored mostly by Democrats, will affect several different groups of people and businesses.
Whose tax payments may increase:
Do you make more than $400,000 per year?
One of the new laws, HB-1311, will eliminate certain state tax deductions for individuals and households with higher incomes, beginning in tax year 2022. (Taxes for that year are due in April 2023).
If you make more than $400,000 per year, you’ll face a new cap on itemized deductions for state taxes. Itemized deductions allow people to lower their taxes by subtracting certain expenses — such as mortgage interests and charitable donations — from their taxable income. Under the new law, those wealthier households can’t subtract more than $60,000 from their taxable income.
The change to itemized deductions is expected to be one of the biggest money-makers for the state, delivering more than $100 million in annual revenue.
The law will also eliminate a deduction for business owners who make more than $500,000 of individual income, or $1 million as a household. They will not be allowed to take the “pass-through” deduction on their state taxes. The state legislature had already temporarily eliminated that break, which was created in the federal tax changes in 2017. That’s expected to draw in nearly $80 million in annual revenue.
Do you put a lot of money in a college savings fund?
People who put money in a 529 college savings account are allowed to take a deduction for those contributions — in essence, sending money straight into the savings account without paying taxes on it. The legislation caps that deduction at $30,000 per household per year. Tax reformers argued that without the cap, the 529 accounts were providing too much benefit for wealthy families. The change takes effect in tax year 2022.
Do you own a business?
The legislation is expected to deliver nearly $150 million in annual revenue by changing how various businesses pay taxes.
The largest sum will come from insurance companies. It will now be more difficult for them to claim a tax deduction that rewards companies with offices in Colorado, which the sponsors say has done little to encourage job growth. They'll also lose a rule that allowed them to pay lower taxes on the sale of certain financial products, compared to other institutions.
Colorado will adopt a new method to calculate the taxes owed by companies that do business in multiple states. By embracing the “Finnigan method,” the state expects to collect nearly $10 million in extra revenue per year.
The legislation also will result in higher tax bills for large retailers and oil and gas companies. Additionally, the new law says that cloud computer access should be taxed. and it attempts to crack down on off-shore tax havens, among other changes.
Do you pay capital gains taxes?
Currently, Colorado taxpayers can be exempted from paying state taxes on capital gains in some cases. That deduction will largely be eliminated starting in tax year 2022, forcing more people to pay state taxes when they sell assets like land, stock and businesses, in addition to federal taxes. People who own certain agricultural property will still be able to take a deduction.
Who will directly benefit:
Do you have kids?
Beginning with tax year 2022, the state will offer a child tax credit — basically, money for households with children.
The credit will be available for individual filers who make less than $75,000 or households under $85,000 in income. The value of the credit will be based on the federal child tax credits, and it will depend on the age of the child and the household income. That could range anywhere from a few hundred dollars to $2,000 per child.
The credit is refundable — meaning that people who don’t have state tax obligations would simply receive a check from the government in that amount.
“We will dedicate more economic relief toward our families, our small businesses, our workers who need it the most,” said state Rep. Emily Sirota, a cosponsor, adding that the new policies were the result of years of work.
Do you own real estate?
Another law will temporarily lower property tax rates for tax years 2022 and 2023. The taxes owed for apartment properties would be reduced by about 5 percent. Single family homes would get a discount of about 3 percent. Agricultural and renewable energy properties would get a 9 percent reduction. And the law also expands a tax-deferment program that allows homeowners to delay property tax payments when their bills increase too fast.
The same law would effectively defuse a separate effort to create a sharper tax cut through a ballot initiative. That drew criticism from some conservatives, who argued the law would short-circuit the process of direct democracy, but the sponsors argued it struck a balance between competing demands. The steeper cut that may go before voters would have especially threatened budgets for rural local governments.
“We need this relief to make sure the economy is strong, make sure we get back on our feet quickly and recover,” Hansen said. “At the same time, we’re making sure that we have the funding for important services in the state — for the fire districts, for the water districts, for the school districts.”
Do you collect the Earned Income Tax Credit?
The state will also offer a bigger refund or discount for people who collect the federal EITC. EITC is available for lower-income households — currently, the limits are about $21,000 for a single filer, or $54,000 for a family with two children.
The state currently provides a 10-percent match to the federal credit. That match will grow to 20 percent for tax year 2022 and to 25 percent in the following year. The benefit could range from a few hundred dollars to more than $1,000. The credit is refundable.
State Sen. Chris Hansen said that lawmakers still had “more work ahead of us,” saying he wanted to see a higher match for the tax credit.
Do you run a small business?
The new legislation will exempt more businesses from paying business personal property taxes. Businesses pay those taxes on the tangible things they own, from furniture to computers. Currently, any business with more than $7,900 in personal property must pay taxes on it. The new law raises that exemption threshold to $50,000 — which means fewer businesses will have to pay this type of tax.
Do you collect social security?
Currently, taxpayers can deduct up to $24,000 of social security income from their Colorado taxable income. Under the change, that deduction will be unlimited, effectively eliminating state taxes on social security for people over 65.
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