1. State Income Tax Rate
For tax year 2025, Colorado continues to maintain a flat individual and corporate income tax rate of 4.40%. There are no scheduled changes to this rate for the year. However, a temporary reduction to 4.36% is projected for tax year 2027, triggered by TABOR refund mechanisms if state revenue surpluses persist.
2. Permanent Addbacks to Federal Deductions
a. Qualified Business Income (QBI) Deduction Addback (IRC §199A)
Colorado requires taxpayers to add back the amount of the federal QBI deduction claimed under IRC §199A when computing Colorado taxable income. This addback applies to owners of passthrough entities (such as S corporations and partnerships) who claim the QBI deduction on their federal returns. The addback is required unless the amount is already added under a different provision (specifically, §39-22-104(3)(o), C.R.S.).
b. International-Related Deductions
- State Tax Deduction Addback (IRC §164(a)(3)): Individuals, estates, and trusts who deduct state income taxes on their federal returns must add back the amount deducted for Colorado purposes. This includes the taxpayer’s share of state tax deductions claimed by partnerships or S corporations.
- Itemized Deduction Cap (H.B. 1311): Taxpayers with federal adjusted gross income (AGI) over $400,000 must add back the amount by which their federal itemized deductions exceed $30,000 (single) or $60,000 (joint).
- Standard/Itemized Deduction Cap (Proposition FF/H.B. 1414): For taxpayers with AGI of $300,000 or more, itemized or standard deductions are capped at $12,000 (single) or $16,000 (joint). Any excess must be added back to Colorado taxable income.
Planning Consideration: High-income individuals and owners of passthrough entities should review their federal deductions carefully, as these addbacks can significantly increase state taxable income and result in higher Colorado state tax liability.
3. Retail Delivery Fee
The retail delivery fee continues in effect for 2025. This fee, currently 28 cents per delivery, applies to all retail sales of tangible personal property delivered by motor vehicle to a Colorado location. Retailers are required to collect and remit this fee, and it must be listed as a separate line item on customer receipts, not included in the sales tax line.
Planning Consideration: Retailers should ensure their point-of-sale systems are updated to separately state the retail delivery fee and remain compliant with collection and remittance requirements.
4. Other Notable Changes and Planning Points
- Sales Tax Vendor Fee Repeal (Effective 2026): The sales tax vendor fee, which allowed small retailers to retain a portion of collected sales tax, will be repealed effective January 1, 2026. For 2025, the fee remains available, but retailers should plan for its elimination in 2026.
- E-Bike Tax Credit: Colorado residents can receive a $450 discount at the point of sale for e-bikes purchased from participating retailers, and retailers can claim a $500 income tax credit. Purchasers must pay sales tax on the pre-discount price.
- Wildfire Mitigation and Medical Savings Account Deductions: These deductions are repealed as of January 1, 2025.
- Conditional Tax Credits: For tax year 2026, the availability and amount of certain tax credits (e.g., decarbonization, workforce shortage, expanded EITC, family affordability) will be reduced due to lower-than-expected state revenue growth. For 2025, these credits are generally available in full.
5. Summary Table of Key Addbacks and Caps for 2025
| Provision | Threshold (AGI) | Cap/Requirement | Applies To |
|---|---|---|---|
| QBI Deduction Addback (IRC §199A) | Any | Full addback of deduction | Passthrough owners |
| State Tax Deduction Addback (IRC §164(a)) | Any | Full addback of deduction | Individuals, estates, trusts |
| Itemized Deduction Cap (H.B. 1311) | $400,000+ | $30,000 (single), $60,000 (joint) | Individuals |
| Standard/Itemized Deduction Cap (Prop FF) | $300,000+ | $12,000 (single), $16,000 (joint) | Individuals |
6. Action Items for Clients
- Review Federal Deductions: High-income individuals and business owners should review their federal deductions for potential Colorado addbacks.
- Update Payroll and Accounting Systems: Ensure systems are updated for the continued application of the retail delivery fee and the correct handling of addbacks.
- Monitor Tax Credit Availability: Stay informed about the status of conditional tax credits for 2025 and 2026.
- Plan for Vendor Fee Repeal: Retailers should prepare for the elimination of the sales tax vendor fee in 2026.
These changes reflect Colorado’s ongoing trend toward decoupling from certain federal tax benefits and increasing compliance requirements for both individuals and businesses. Proactive planning and regular review of Colorado-specific tax rules are essential for minimizing state tax liability and avoiding compliance issues.