April 2026 – Colorado Tax Topics

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April 2026 – Colorado Tax Topics

Colorado Tax Discussion

As the Colorado tax landscape continues to evolve, it’s important to understand how existing rules and recent changes may affect your tax planning. Below is a summary of key items relevant to individuals and business owners filing Colorado returns.

Key Colorado Deductions (Subtractions) to Highlight

1. Colorado 529 Plan Tax Benefits (CollegeInvest Contribution)

Colorado offers a generous state income tax subtraction for contributions made to Colorado CollegeInvest 529 college savings plans. Contributions reduce Colorado taxable income but do not reduce federal taxable income.

Key Points:

      • Individuals can subtract from income qualifying contributions they make to a Colorado CollegeInvest 529 plan on their Colorado return.
      • There are annual per-beneficiary limits on the deduction:
        • 2025: $25,400 for single filers and $38,100 for joint filers (per beneficiary)
        • 2026: $26,200 for single filers and $39,200 for joint filers (per beneficiary)
      • Contributors don’t have to be a parent – grandparents and others may contribute and claim the subtraction if requirements are met.
      • Contributions used for non-qualified purposes (non-higher education expenses) may trigger Colorado additions back to income if the deduction was previously claimed.

2. Charitable Contribution Subtraction (For Standard Deduction Filers)

Colorado allows a state-level charitable deduction, if the taxpayer does not itemize federally.

      • Available to taxpayers who claim the federal standard deduction.
      • Subtraction equals qualified charitable contributions made during the year over $500.
      • This is separate from federal treatment.
      • Note: For contributions totaling over $5,000, you are required to provide documentation of the contributions. If you believe this situation applies to you, please ensure to provide documentation with your tax return information so we can attach the documentation to your tax return.

For planning, this can be particularly helpful for taxpayers that will be impacted by the Colorado standard deduction addback. 

3. Social Security Income Subtraction

Colorado provides generous exclusions for Social Security benefits

      • Ages 55-64: Partial subtraction (income-limited)
      • Ages 65+: Up to 100% of Social Security income may be excluded
      • Applies regardless of federal taxation of benefits

4. Pension and Annuity Income Subtraction

Colorado allows a subtraction for certain retirement income. This helps mitigate Colorado tax on RMDs and retirement income even when federal income remains high.

      • Available for:
        • Pension
        • Annuities
        • IRA distributions
      • Age-based limits:
        • Ages 55-64: Limited subtraction
        • Ages 65+: Larger exclusion (often up to $24,000 per person)

5. Colorado Enterprise Zone & Business Incentives

Colorado Enterprise Zone incentives offer valuable opportunities for businesses that invest, hire, or expand in designated areas.

      • Enterprise zone credits and subtractions
      • Job growth incentives
      • Investment tax credits
      • Research & development credits

Related to this, you can also take advantage of a Colorado income tax credit if you donate to a certified Enterprise Zone contribution project.

6. US Government Interest Subtraction

Colorado allows a subtraction for qualifying interest income from obligations of the United States and its possessions, to the extent that interest is included in federal taxable income.

In general:

      • Interest from US treasury bills, notes, and bonds may be subtracted on the Colorado return.
      • There is no fixed dollar cap on the amount that may be subtracted.
      • The subtraction applies only to qualifying US government obligations – not all bond interest.

Decoupling Items for Colorado from Federal

Colorado typically uses rolling conformity to the Internal Revenue Code, meaning federal law changes are automatically incorporated into Colorado law – unless a state specifically decouples. Below are a few items Colorado is decoupling with federal law moving forward.

1. Qualified Business Income (QBI) Deduction – Addback (Permanent)

Under federal law, many business owners can claim a Qualified Business Income (QBI) deduction. However, Colorado decoupled from this federal deduction for state tax purposes to protect the state revenue base.

What this means for you:

      • This started in 2021 and has already been implemented for tax years 2021-2024; however, starting in 2026 this will now be a permanent add back to federal taxable income used to calculate your Colorado taxable income.
      • This addback generally applies if adjusted gross income exceeds:
        • $500,000 for single filers
          • $1,000,000 for joint filers
      • There is an exception if the taxpayer reports Schedule F farm income.

2. Overtime Pay Federal Deduction – Addback (Starting in 2026) 

Under the federal One Big Beautiful Bill Act (OBBBA), certain taxpayers can deduct up to $12,500 of overtime pay (and up to $25,000 for joint filers) on their federal tax returns for 2025-2026. Colorado has decoupled from this federal deduction:

      • Beginning in 2026, Colorado requires taxpayers to add back any overtime deduction claimed federally when calculating Colorado taxable income.
      • Note: For tax year 2025 only, Colorado does not yet add back the federal overtime deduction – so overtime will be excluded federally and for Colorado in 2025.

3. Other Non-Decoupling but Relevant Addbacks

Though not new for 2025-2026, Colorado continues to require addbacks of certain federal deductions and itemized deductions that affect Colorado taxable income, including:

      • Federal itemized deductions and standard deduction impacts (Tax Years 2023 and later) – high-income taxpayers must add back to Colorado taxable income any amount of their federal itemized or standard deduction that exceeds the state-defined limit.
        • Who is subject to this addback?
          • Any taxpayer whose federal AGI is $300,000 or more (all filling statuses).
          • Addback will the any amounts exceeding $12,000 for single or $16,000 for joint filers.
        • State and local tax deduction addbacks – Colorado requires taxpayers to add back their federal deduction for state income taxes when computing Colorado taxable income.

4. Out-of-State Municipal Bond Interest Addback

While interest from municipal bonds is generally exempt from federal income tax, Colorado does not follow this treatment for all municipal bond interest. The exemption for Colorado is only allowed for interest earned on Colorado-issued municipal bonds.

As a result, interest income from municipal bonds issued by other states or local governments outside Colorado must be added back to income on the Colorado tax return if it was excluded at the federal level.

If you have any questions regarding any of the information provided and how this may impact your tax situation for tax year 2025 and/or 2026, please reach out to us and we are happy to assist with any questions that you may have.