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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- Our Tax Expert
Jennifer Mansfield, CPA Tax
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.
Colorado Retirement Taxes
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.
Property taxes in Colorado are among the lowest in the U.S. The average effective rate in the state is 0.55%. 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 0.55%, fifth lowest in the U.S. Because the median home value in Colorado is $286,100, that means the typical Colorado homeowner pays $1,575 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 years. There are exceptions for widows and widowers, though.
How high are sales taxes in Colorado?
While Colorado’s statewide sales tax of 2.9% ranks as the sixth lowest in the U.S., the average total sales tax, which includes local taxes, is actually fairly high. The average total rate is 7.63%, 16th highest in the country. 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.
Most Tax Friendly Places for Retirees
SmartAsset’s interactive map highlights the places in the country with tax policies that are most favorable to retirees. Zoom between states and the national map to see the most tax-friendly places in each area of the country.
Methodology To find the most tax friendly places for retirees, our study analyzed how the tax policies of each city would impact a theoretical retiree with an annual income of $50,000. Our analysis assumes a retiree receiving $15,000 from Social Security benefits, $10,000 from a private pension, $10,000 in wages and $15,000 from a retirement savings account like a 401(k) or IRA.
To calculate the expected income tax this person would pay in each location, we applied the relevant deductions and exemptions. This included the standard deduction, personal exemption and deductions for each specific type of retirement income. We then calculated how much this person would pay in income tax at federal, state, county and local levels.
We calculated the effective property tax rate by dividing median property tax paid by median home value for each city.
In order to determine sales tax burden we estimated that 35% of take-home (after-tax) pay is spent on taxable goods. We multiplied the average sales tax rate for a city by the household income after subtracting income tax. This product is then multiplied by 35% to estimate the sales tax paid.
For fuel taxes, we first distributed statewide vehicle miles traveled to the city level using the number of vehicles in each county. We then calculated miles driven per capita in each city. Using the nationwide average fuel economy, we calculated the average gallons of gas used per capita in each city and multiplied that by the fuel tax.
For each city we determined whether or not Social Security income was taxable.
Finally, we created an overall index weighted to best capture the taxes that most affect retirees. The income tax category made up 40% of the index, property taxes accounted for 30%, sales taxes 20% and fuel taxes 10%.
Sources: Internal Revenue Service, Social Security Administration, state websites, local government websites, US Census Bureau 2018 American Community Survey, Avalara, American Petroleum Institute, GasBuddy, UMTRI, Federal Highway Administration