Earlier this year, Colorado lawmakers made significant changes to the state tax code. Indeed, the changes are expected to touch most Colorado taxpayers in one way or another. However, certain adjustments are more likely to impact the wealthiest Coloradans. Since many of these bills go into effect after the New Year, here are three tax changes that may affect your personal finances—and how you can prepare accordingly.
#1: TAX LOOPHOLES FOR RESIDENTS EARNING MORE THAN $400,000 PER YEAR
If you make more than $400,00 annually, you’ll face a new cap on itemized deductions on your Colorado tax return. Beginning in 2022, wealthy households won’t be able to deduct more than $60,000 from their taxable income.
Business owners earning more than $500,000 individually or $1 million jointly won’t be able to take the state portion of the “pass-through” deduction. While this deduction was temporarily eliminated last year, the new bill makes the change permanent.
In addition, Colorado allows residents to contribute money directly to a 529 savings account without paying taxes on it. The new legislation will cap this deduction at $30,000 per household each year.
Consequently, high earners and business owners may want to consider accelerating certain expenses and taking advantage of current loopholes before the end of the year. For example, if you plan on making a large charitable donation in 2022, you can claim the full deduction in 2021 by funding a donor-advised fund (if you itemize). Be sure to work with a fiduciary financial advisor or CPA to look for additional opportunities to reduce your tax bill.
#2: PROPERTY TAXES
Under the new tax code, property owners may see temporarily lower property tax rates in tax years 2022 and 2023. Single-family homes would get a property tax discount of about 3%. Meanwhile, apartment property owners would see their property taxes drop by about 5%. Agricultural and renewable energy properties are also likely to see a significant reduction in property taxes.
But that doesn’t necessarily mean your property taxes will go down. House Bill 1164 seeks to correct the balance between what the state pays and what school districts pay to finance public education by allowing districts to slowly raise their mill-levy rates.
In November, Roaring Fork School District voters passed a measure to increase property taxes to source funds for increasing teacher salaries. The mill levy override goes into effect on Jan. 1 and the actual allotment won’t be known until the end of December.
#3: COLORADO TAX LAW CHANGES TO CAPITAL GAINS AND SOCIAL SECURITY BENEFITS
Currently, Colorado taxpayers can be exempt from paying state taxes on capital gains in some cases. The new tax code eliminates that deduction, forcing more people to pay state taxes when they sell property and other types of investments.
However, there is some good news for retired wealthy Coloradans. Specifically, if you’re over 65 and receiving Social Security benefits, you may receive a partial tax break next year.
Presently, Colorado taxpayers can deduct up to $24,000 of Social Security income from their taxable income. Beginning in 2022, the deduction will be unlimited, essentially eliminating state taxes on Social Security benefits for people over 65.
PLANNING FOR COLORADO TAX LAW CHANGES IN 2022 AND BEYOND
While these tax changes are among the most significant in Colorado history, tax laws are continually in flux. And we’re likely to see additional changes at the federal level.
Anticipating relevant changes to the tax code and planning accordingly can help you protect and preserve your wealth over time. Consider working with a fiduciary financial advisor like Sherwood Wealth Management, who can recommend specific strategies to help you minimize your tax bill.
This article also appeared in The Aspen Times.