Colorado’s new tax credits could be worth more than $3,000 for some families. Here’s when — and how

Shanna Lewis/KRCC News
Kids stay cool at a splash pad on the Colorado State Fair in Pueblo on Saturday, Aug. 26, 2023.

Colorado lawmakers this year passed major new benefits for low-income families. New laws will provide hundreds, or thousands, of dollars for families with kids and working low-income families.

The biggest changes are the creation of a new Family Affordability Tax credit and the expansion of the Earned Income Tax Credit, both of which were signed into law by Gov. Jared Polis in recent weeks. The benefits kick in for the current tax year, and people should expect to see the effects when they file their taxes early next year.

In all, well over $1 billion per year could be provided to those families in the form of refundable tax credits. That money is being taken out of the TABOR surplus — so, instead of being refunded in payments to all taxpayers, some will go to cover these credits and other changes.

Here are the details of when and how the credits will be paid.

Child tax credits in Colorado: When, how much and for whom?

The Family Affordability Tax Credit, also known as a child tax credit, will be paid to hundreds of thousands of families with children. For the poorest families with the youngest children, it could be worth $3,200 per kid. The size of the benefit will decrease with the child’s age and with the family’s income.

It’s a refundable tax credit. That means its full value can be paid out as cash, even if the family doesn’t owe any taxes. 

The credit will be paid out starting next year, when families file their 2024 taxes ahead of Tax Day, which is April 15, 2025.

The law’s backers say that it will reduce Colorado’s rate of child poverty by half. It could effectively grow the poorest family’s incomes by 20 percent or more. About 370,000 households are expected to qualify for the benefit.

“This historic effort will significantly reduce childhood poverty in Colorado, boost the incomes of hardworking families, and help millions of Coloradans who are feeling the greatest impacts of the cost of living in our state,” said Rep. Chris deGruy Kennedy, a Democratic sponsor of the measure, in a statement

It remains in effect through tax year 2033.

How much will it cost?

The credit is expected to cost an estimated $740 million per year once it’s fully in effect, and it could be even more, depending on how many qualifying households actually collect the credit.

Republicans and others have criticized the measure as a method of wealth redistribution, saying that TABOR funds should go directly back to all taxpayers instead of being earmarked for certain groups. They also argue that it’s only fair that people who contribute more in taxes up front — those with higher incomes — should get more of that money back via refunds or lower tax rates. The net effect of the Family Affordability credit is to raise the tax burden on the wealthier families who normally benefit the most from standard TABOR refunds, using the money to benefit lower-income families instead.

“It shows somewhat of a deep contempt for the voters,” said Rep. Bob Marshall, a Democrat, in an April interview. “We're trying to find a way around [TABOR requirements] because we don't like the fact that we have to give $2 billion back to the taxpayers.”

The value of the child tax credits will depend on the size of the state’s TABOR surplus. In years where the surplus is smaller, the child tax credit will be smaller. But that also means that in years with smaller surpluses, the child tax credit could take up most or all of the available surplus dollars. 

Expanded EITC: Who benefits, and when?

Another new law will permanently expand the state’s Earned Income Tax Credit, which is meant to be a benefit for working low-income individuals and families. 

The value of the state EITC is determined by the federal version of the same credit. Colorado matches a certain portion of the federal credit. Under the new law, Colorado will start matching a greater portion of the credit. It could benefit some families by several hundred dollars, depending on their income and how many kids they have.

The changes start with the current tax year. But recipients might not actually notice a difference when they get their refunds in 2025. 

That’s because the value of the state EITC is currently unusually high, and, for now, the new law is simply extending that unusually high value for another year. The state EITC will once again be worth 50 percent of the federal credit.

After the current tax year, the state EITC will start shrinking. By tax year 2026, it will stabilize at a permanent new value — 30 percent of the federal credit. That’s significantly higher than the previous baseline value old value.

The new law is expected to cost more than $200 million per year. That money will also come out of the TABOR surplus pool, reducing the size of TABOR refunds — drawing similar criticisms as the family tax credit.

Income tax cut

Colorado’s income tax rate is currently 4.4 percent. Under a bipartisan law, that rate will be reduced by various amounts over the next decade. The changes will start showing up with taxes that are paid next Tax Day in April.

For tax year 2024, the tax rate will likely go down to 4.25 percent. That’s a reduction of 0.15 percent points, or about $150 savings for someone who makes $100,000 a year.

The tax rate may then float up and down over the coming years, ranging from 4.25 to 4.4 percent. The stronger the economy (and the larger the expected TABOR surplus), the lower the tax rate. Lowering the tax rate will result in smaller TABOR refunds since that money isn’t being collected in the first place.