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Colorado Retirement Tax Friendliness

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Overview of Colorado Retirement Tax Friendliness

Colorado’s income tax system allows for a rather large deduction on all retirement income. Property taxes in Colorado are among the lowest in the U.S. While sales tax is relatively high in the state, groceries and medicine are tax-exempt.

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You will pay of Colorado state taxes on your pre-tax income of
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Quick Guide to Retirement Income Taxes
is toward retirees.
Social Security income is taxed.
Withdrawals from retirement accounts are taxed.
Wages are taxed at normal rates, and your marginal state tax rate is %.
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    Jennifer Mansfield, CPA, JD/LLM-Tax, is a Certified Public Accountant with more than 30 years of experience providing tax advice. SmartAsset’s tax expert has a degree in Accounting and Business/Management from the University of Wyoming, as well as both a Masters in Tax Laws and a Juris Doctorate from Georgetown University Law Center. Jennifer has mostly worked in public accounting firms, including Ernst & Young and Deloitte. She is passionate about helping provide people and businesses with valuable accounting and tax advice to allow them to prosper financially. Jennifer lives in Arizona and was recently named to the Greater Tucson Leadership Program.

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Colorado Retirement Taxes

Photo credit: ©iStock.com/nicoolay

A Rocky Mountain retirement means beautiful scenery, access to some of the best skiing in the world and lots of sunshine. It also means relatively low taxes.

Retirees can deduct between $20,000 and $24,000 in retirement income from state taxes in Colorado, depending on their age. Taking that deduction into account, income from sources such as Social Security or pensions may be mostly or entirely state-tax-free for many Colorado retirees.

Although sales taxes in Colorado are somewhat higher than the national average, seniors who own a home will benefit from some of the lowest property taxes in the country.

A financial advisor in Colorado can help you plan for retirement and other financial goals. Financial advisors can also help with investing and financial plans, including taxes, homeownership, insurance and estate planning, to make sure you are preparing for the future.

Is Colorado tax-friendly for retirees?

Colorado is fairly tax-friendly for those looking for a place to spend their golden years. The income tax system allows for a deduction of $24,000 per year on all retirement income for persons age 65 or older. If you're between 55 and 64 years old, this deduction shrinks to $20,000 a year.

Property taxes in Colorado are among the lowest in the U.S. The average effective rate in the state is 0.49%. Sales tax is relatively high but items on which seniors spend the most money (groceries and medicine) are exempt.

Is Social Security taxable in Colorado?

Yes, but only above a certain level. Colorado offers a retirement income deduction of $20,000 annually for persons age 55 to 64 and $24,000 annually for persons age 65 and up. For married couples, each person can claim the deduction. It applies to Social Security, so someone with Social Security income of $18,000, which is close to the average for U.S. households, would not need to pay income taxes on that amount.

Are other forms of retirement income taxable in Colorado?

The same deduction described above applies to income from pensions and distributions from a 401(k) or IRA. This deduction, which is $20,000 for those age 55 to 64 and $24,000 for age 65+, applies to the total of all retirement income: Social Security, pensions and retirement accounts. So if you are 70 years old and have $18,000 in Social Security income and $15,000 in income from a 401(k), you would still have to pay taxes on $9,000 of that ($33,000 minus $24,000).

That $9,000 is combined with any income you have from other sources like wages or salaries and taxed (less other deductions or exemptions) at the Colorado state income tax rate of 4.63%. That is a flat rate and applies equally to all levels of income.

How high are property taxes in Colorado?

The average effective property tax rate in Colorado is 0.49%, one of the lowest in the U.S. Because the median home value in Colorado is $394,600, that means the typical Colorado homeowner pays $1,951 in property taxes each year. Thanks to the senior property tax exemption (described below), seniors may be able to pay even lower rates than that.

What is the Colorado senior property tax exemption?

The senior property tax exemption is a form of property tax relief available to seniors who own and occupy their home in Colorado. The exemption is equal to 50% of the first $200,000 in home value. So, for example, if a home is worth $100,000, $50,000 of that will be exempt from property tax. However, if a home is worth $400,000, only $100,000 will be exempt.

To qualify, a person must be at least 65 years old and have owned and occupied the house as a primary residence for at least 10 consecutive years. There are exceptions for widows and widowers, though.

How high are sales taxes in Colorado?

Photo credit: ©iStock.com/Aleksander Mirski

While Colorado’s statewide sales tax of 2.9% ranks as one of the lowest in the U.S., the average total sales tax, which includes local taxes, is actually fairly high. The average total rate is 7.65%. That could hurt a retiree’s budget, but exemptions for groceries and prescription medicine should help lessen the blow.

What other Colorado taxes should I be concerned about?

Colorado does tax most types of capital gains at the state income tax rate of 4.63%, so it’s important to keep that in mind when selling any assets that aren’t part of a retirement account. The Centennial State does not have an estate tax or an inheritance tax.

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