Colorado State Income Tax: What Residents Need to Know

Colorado uses a flat individual income tax rate, one of the more straightforward state income tax systems in the country. But Colorado also has unique features — including a constitutional spending limit called TABOR that can result in state income tax refunds when the state collects more revenue than it's allowed to keep — that make Colorado's tax environment distinctive.

The Flat Rate

Colorado's income tax rate is a flat 4.4% (reduced from 4.55% starting in 2022 under Proposition 121). This rate applies to most income: wages, business income, capital gains, and other sources. Colorado generally starts with federal adjusted gross income and makes a relatively small number of adjustments, making the Colorado return simpler than many other states.

TABOR Refunds

The Taxpayer's Bill of Rights (TABOR) is a constitutional provision that limits how much revenue the state government can keep. When state revenue exceeds the TABOR cap, the excess must be returned to taxpayers. This has resulted in actual tax refunds to Colorado residents in recent years, either through a refundable credit on the state return or a reduction in the tax rate. The specifics change year to year based on whether TABOR kicks in and how the legislature structures the refund.

Retirement Income

Colorado offers a pension and annuity subtraction for certain retirement income. Taxpayers 65 and older can deduct up to $24,000 of pension and annuity income (amounts change annually), and Social Security income may be deductible depending on your federal AGI. This provides meaningful tax relief for retirees on fixed income.

Property Tax

Colorado property tax rates are relatively low, but assessed values have increased significantly in many parts of the state due to rapid appreciation in the Front Range real estate market. Colorado has a Senior Property Tax Exemption that reduces the assessed value for qualifying seniors who have owned and occupied their home for at least 10 years.

Sales Tax

Colorado has a state sales tax rate of 2.9%, one of the lower state rates in the country. But Colorado allows localities to add significant additional sales taxes, and combined rates in Denver and other metro areas can reach 8-9%. Groceries are exempt from state sales tax but may be subject to some local taxes.

Remote Workers Moving to Colorado

Colorado's flat 4.4% rate, combined with lower property taxes and no estate tax, makes it an increasingly popular relocation destination. Remote workers who move to Colorado should update their withholding on their W-4 equivalent for Colorado and consider whether their former state has any continuing tax claims on their income.