Colorado State Tax Updates 2022
Colorado had implemented changes to Tax Laws that could impact you in 2022. Entities have a new way to pay your state taxes in some instances while individuals will see changes to various deductions.
Entity Tax Changes: Partnerships and S corporations may now make ‘PTE’ or elective pass-through entity level tax.
Prior to 2017, individuals were able to itemize and deduct your State taxes paid; this deduction category was subsequently limited to $10,000 (category comprised of state income tax, real property tax and personal property tax). This dramatically increased tax liability for high income earners who had large State tax payments. States started creating ‘workarounds’ to get around this and Colorado has implemented such a ‘work around’ for 2022 for high earning business owners.
Starting this year companies that earn more than $112,000 of Net Income or $5,000 in State tax liability (2022 rate of 4.5%) can pay Colorado tax at the entity level and deduct Federally on the entity tax return. The result is similar to the historical ability to deduct these payments at the personal level. At this time, Colorado has not created a payment mechanism. The State will not be assessing underpayment penalty in 2022, at this time we don’t have a firm date to anticipate vouchers.
Individual Tax Changes: H.B. 21-1311 also enacted several changes to the individual income tax computation.
Cap on College Savings (529) Deduction: Previously unlimited, Colorado has capped at $20,000 per year per beneficiary for single taxpayers and $30,000 for joint returns. This will be adjusted annually starting in 2023 and beyond.
Limits on Qualified Business Income Deduction: The existing income limit for allowance of the QBI or Sec 199A deduction has been extended through tax year 2025. For tax years beginning in 2022 and beginning before 2026, taxpayers with FAGI of at lease $400,000 will be required to addback Colorado taxable income itemized deductions over a capped amount ($30,000 for single and $60,000 for married filing joint taxpayers)
State Earned Income Credit Increased and the State Child Tax Credit has been expanded for years 2022 and thereafter.