Determining Colorado Residency Status for Income Tax
A full-time resident is someone who has established a permanent home in Colorado for the entire year. This means that you are physically present in Colorado the majority of the year and you have an intent to remain in the state long-term. Determining whether you are a full-time resident and whether you have established residency in Colorado comes down to an individual accounting of your physical presence in the state as well as a subjective determination of intent. You have a permanent home in Colorado if you:
Not every person residing in Colorado will satisfy the requirements under all of the factors delineated above, though most will. For example, if you are a student who keeps their home in another state while attending school in Colorado you are not going to be considered a full-time resident. As a student, however , there may be factors that combine to show you have both physical presence and intent to remain in the state longer term. A good rule of thumb is to consider whether you consider yourself a patient traveler or a resident of the new state. But remember, it is up to you to demonstrate that you are not a full-time resident of Colorado.
A part-year resident is someone who is a resident of Colorado for a portion of the year but not the entire year. Someone transferred here by their employer temporarily or someone who moved into the state for a short period of time and then moved away is an example of a part-year resident.
A nonresident is someone who does not reside in Colorado at all. However, income earned in Colorado may still subject you to Colorado income tax obligations as a nonresident which are allocated to income as derived from Colorado based upon business and personal contact with the state (a nonresident return).
Colorado Income Taxation of State Residents
Since the State of Colorado taxes individuals on the basis of their residency without regard to their source or type of income, a Colorado resident has to report all of his or her income, regardless of its source. Colorado imposes an income tax for the privilege of exercising the legal right to make money within the state. Colorado law requires anyone over the age of 18 to file a Colorado income tax return if they have a federal adjusted gross income in excess of $10,000 for single filers and $20,000 for joint filers (these thresholds are lower for taxpayers with certain types of income). In addition, a nonresident who engages in a job, trade, business, profession, or occupation in Colorado, which results in taxable income in excess of $100.00, must file a Colorado tax return. Further, if you had Colorado tax withheld from an item of income and did not receive a W-2 or other information document evidencing that amount, you might have to file a Colorado tax return. Note, individuals who move out of Colorado and are no longer residents of the state may be required to file a part-year return. That Return reports the individual’s Colorado source income earned only during the time period when the individual was a Colorado resident.
Residency status has a direct impact on whether or not a person owes Colorado income tax because an individual’s residency status determines the source of the income that must be reported to the State of Colorado. A nonresident of Colorado is taxed on only his or her source income earned from either personal services, rents, royalties, dividends, or sales of tangible or intangible personal property. Nonresidents do not have to pay Colorado income tax on capital gains earned from the sale of stocks, bonds, or similar securities.
Colorado Part-Year Residency and Income Tax
In addition to full-year residents, some taxpayers move to or from Colorado during the year, making them part-year residents. If you are a part-year resident of Colorado, you are required to file specific Colorado tax forms based on your residency status. When filing your taxes, you can truly benefit by separating your Colorado income into distinct periods. For example, if you moved into the state in May and paid rent in three different locations between then and year-end, you should complete three separate rent deduction forms to maximize your refund. Part-year residents who moved out of the state before December 31 must complete a Form 104U, Part-Year Resident Individual Income Tax Return by April 15 of the following year. Form DR 0024 informs the department of revenue that you have moved from Colorado so they can update the taxpayer and voter registration databases. If you made any money in Colorado during the period of residence between filing your initial state of residence to before filing Part-Year forms, you will have to file and pay income taxes to that specific state. You may be eligible for a nonresident tax return (for example, for an out-of-state resident who worked in Colorado but only lived there sporadically). If you moved into Colorado during the year or are still a part-year resident, you must also file a Form 104, Individual Income Tax Return, by April 15 of the next year. Part-year residents who move into Colorado during the year will not receive property tax rebates for any paid rents unless it occurred in Colorado.
Income Tax for Non-Residents of Colorado
In addition to the state income tax rate on Colorado-source income, there is also a flat 4.63% income tax rate on your total Colorado taxable income if you are not a resident of Colorado (or a part-year resident). This includes employees of Colorado-based companies even if you were not physically present in Colorado, and even those who work remotely from another state for a Colorado-based company are included in this category. For example, there are a number of tax services offered remotely from Colorado including some legal services. Federal employees who work in Colorado but for a federal agency, however, will not pay Colorado income taxes. Colorado law permits an employee engaged in interstate commerce (i.e., working in more than one state) to establish a tax home in a non-work state and preserves that right even when you live in the state where you are working. Thus, those types of workers are not taxed on their Colorado-source income. In other words, the employee must have a home for indefinite use and a regular business or personal attachment to a state other than the state in which they are currently working to avoid state taxation.
And what about double taxation? Fortunately, Colorado has reciprocity agreements with the states of Iowa, Kansas, Kentucky, Arizona, Illinois, Michigan, Montana, and Wisconsin so that a resident of Iowa, Kansas, Kentucky, Colorado, Arizona, Illinois, Michigan, Montana, or Wisconsin working in the other state, Nebraska residents with employers in Colorado, and reciprocal state residents working in another reciprocal state are taxed only in their state of residency. Does that mean that you can live in Nebraska and work for a Colorado company part-time or remotely? No, you will still be taxed on your income in Colorado unless you are really employed remotely for an out-of-state employer and you can show the Court that the employment is as such.
Proving Residency Status for Colorado Income Tax Purposes
To prove that an individual is a resident of Colorado for tax purposes, they have the burden of establishing all of the factors identified above. This will often be done through production of Colorado residency documents, such as utility bills, car registration, Colorado driver’s license, etc. However, if there are not enough factor-based proof to sufficiently establish residency, the Colorado Department of Revenue will then examine all of the circumstances of the case and consider the intent and objective facts in order to make the final residence status determination as to whether a person is a Colorado resident or non-resident. In other words , if a taxpayer only has one or two factors in place, such as a Colorado driver’s license and a utility bill showing the address, that may be enough to potentially nudge the analysis favorably in favor of a state residency determination, but will most likely lead to a fact-intensive inquiry based on the circumstances present. Thus, it is important for Colorado domicile tax compliance and tax planning purposes to review all relevant diligence and evidence in specific cases of an individual to determine whether and to what extent Colorado residency may apply.
Changes in Colorado Residency and Their Tax Effect
When a person has lived in more than one place during a year, he or she must determine the appropriate state(s) for reporting taxable income and paying state income taxes. If you moved to Colorado from another state or moved out of Colorado during the taxable year, you may be required to file a part-year overhead return (Form 104PN). You are a "part-year resident of Colorado" if, during a tax year, you moved out of Colorado on a certain date or moved into Colorado on a certain date.
The Colorado Department of Revenue (CDOR) considers a person a resident of Colorado if their permanent home was located within the boundaries of Colorado for a portion of any date of the taxable year. For example, if on January 1 you lived in Colorado but moved to New Mexico on December 31, you are a Colorado resident for the tax year.
If you moved to Colorado during the tax year from another state, you are not a part-year resident. You are a full-year resident of Colorado for the entire year. If you only lived in Colorado for a portion of the tax year, you should carefully review the residency information from the CDOR to determine your Colorado residency status.
Colorado requires tax returns to be filed electronically. You may use a tax preparation service or prepare the return yourself using the computer software package of your choice. In either case, simply follow the process to generate the online income tax return. After finishing the online return, specify how you will be filing your return with the CDOR. This information will determine how you receive your online income tax return or whether you may have to print out a paper return and mail it to the CDOR.
Some changes may affect the tax treatment of your household income in accordance with Colorado law. If you moved from Colorado during the year, you may have to adjust your current income downward to reflect your share of total household income after moving from Colorado. You must adjust your income to account for your non-Colorado income earned before leaving Colorado. Under the Colorado Income Tax Reform Act of 1986, after your move from Colorado, your income is considered the entire household income adjusted down to reflect your share of the total household adjusted income for the period before your move.
Mistakes in Reporting Residency for Colorado Income Tax
One common mistake is failure to account for the transactions that occur before you officially become a Colorado resident. The Colorado Department of Revenue treats as Colorado source income any amounts of income earned or received prior to becoming a resident if those amounts can reasonably be attributed to a Colorado source. These amounts are subject to taxation in Colorado, so it is important to plan for them and accurately report them on your income tax return.
Another frequent error is failure to properly calculate your flee date. "When is my Colorado residency year?" can be a hard question to answer. In some cases, you may not even know when it commences until some time after the fact. The Colorado Department of Revenue explains the general rules in its Publication 103, but the specific rules applicable to you may vary based on the particular facts in your situation. For example, if you conduct business (e.g., own a business, etc.) in Colorado but do not yet reside in Colorado, you need to pay attention to which "source" these payments are being categorized. Are the amounts received attributable to you personally, as a resident of Colorado? Are they attributable to a Colorado source (even though paid to an individual that is not a resident of the state)? Reporting "Colorado source" income on your income tax return may result in a higher tax bill than reporting "Colorado non-resident" income. Make sure to analyze the impact of Colorado income tax on your situation before filing.
Another issue many people experience is not being aware that their Colorado source non-resident income could be taxed in another state . Because Colorado taxes your non-resident income from a source located in other states, you could end up with a tax liability in both states. You must pay the tax to whichever one claims residence over your non-resident income.
In many cases, a tax credit is available from the state where the non-resident income from a particular source was earned to offset the tax liability in the second state. But in at least one state, California, the credit is available for Colorado source income only, which would exclude your non-resident income. You should avoid this situation by calculating the taxable income, tax and credit separately for your resident and non-resident income. By doing this, you will avoid the extra California tax, and the credit in Colorado will be reduced accordingly.
The issue of multiple state residency is another area that requires careful analysis. If you spend significant amounts of time in more than one state, each state will have its own rules that determine when a person becomes a resident or is temporarily a resident due to extended physical presence. This may happen even if the person herself does not realize it. If you live in and commute to Denver, own a condo near the office and have the intention of living there during the work week, you will become a resident of Colorado if you spend more than half of the year here or if you have a permanent home here with the intention to remain.
If you have become a part-year resident of several different states during the year, you also need to give to your tax professional the list of all of your paychecks and other amounts earned or received in each of the different states in order to get the best tax treatment.