Colorado has a state income tax, and it applies to most types of income you earn
Yes. Colorado taxes ordinary income — wages, salaries, self-employment earnings, interest, and dividends — at a flat rate. The state does not tax capital gains the way the federal government does, but it does tax them as ordinary income. Colorado also has a separate tax on certain investment income called the Colorado Long-Term Capital Gains Tax, which is newer and narrower than the federal version.
The state income tax is separate from federal income tax. You file both. Colorado's rate applies to income earned in the state or by Colorado residents, regardless of where the income came from. If you work in Colorado but live in another state, you may owe Colorado tax on your wages. If you live in Colorado but work in another state, you may owe tax to both states — though Colorado has reciprocal agreements with some neighboring states that can reduce or eliminate that overlap.
Key Takeaways
- Colorado taxes ordinary income at a flat rate that has varied between 4.4% and 5.55% in recent years, set by the state legislature annually.
- The state also imposes a separate Long-Term Capital Gains Tax on certain investment sales, which is different from how ordinary income is taxed.
- You file a Colorado state return in addition to your federal return, using Form 104 for residents or Form 104-EP for part-year residents and nonresidents.
- If you work in Colorado but live elsewhere, you likely owe Colorado tax on those wages, though some neighboring states have reciprocal agreements that may reduce your liability.
Colorado's ordinary income tax rate and how it is set
Colorado uses a flat tax rate, meaning everyone pays the same percentage regardless of income level. This is different from the federal system, which uses brackets where higher earners pay higher rates on each additional dollar. The state rate has moved between 4.4% and 5.55% over the past decade, depending on legislative action and voter-approved changes.
The rate is not fixed permanently. The state legislature can change it, and voters can approve or reject changes through ballot measures. For example, in 2021, voters approved a measure that temporarily increased the rate to fund education. You need to check the current year's rate when you file, because it may differ from the previous year. The Colorado Department of Revenue publishes the rate each year on its website and on the Form 104 instructions.
The Colorado Long-Term Capital Gains Tax
In addition to ordinary income tax, Colorado taxes long-term capital gains — profits from selling investments you held for more than one year — under a separate rule. This tax applies only to gains above a certain threshold (currently $25,000 per year for individuals, though this may change). The rate is 4.63%, and it applies only to the gains themselves, not to the original amount you invested.
This is narrower than the federal capital gains tax, which applies to all long-term gains regardless of size. For example, if you sold stock and made a $50,000 gain, Colorado would tax only the $25,000 above the threshold at 4.63%. Short-term capital gains (from investments held one year or less) are taxed as ordinary income at the flat rate, not under this separate rule.
Who must file a Colorado state return
You must file a Colorado return if you are a resident with income above a certain threshold, or if you are a nonresident or part-year resident with Colorado-source income. Residents are people who lived in Colorado for the entire tax year or who claim Colorado as their permanent home. Nonresidents earned income in Colorado but lived elsewhere the whole year. Part-year residents moved to or from Colorado during the year.
The income threshold for filing changes yearly and depends on your age and filing status. The Colorado Department of Revenue publishes these thresholds in the Form 104 instructions each January. If you are self-employed, you must file if your net earnings are $400 or more, regardless of the threshold. If you are a nonresident or part-year resident, you file only on Colorado-source income — wages earned in Colorado, business income from a Colorado business, or rental income from Colorado property.
Which form to use and how Colorado return filing works
Colorado residents use Form 104, the Colorado Individual Income Tax Return. Nonresidents and part-year residents use Form 104-EP (Nonresident or Part-Year Resident Return). Both forms are filed with the Colorado Department of Revenue, not with your federal return. You file them separately, usually at the same time you file your federal return.
You will need your federal adjusted gross income (AGI) from your federal return to complete the Colorado form. If you itemize deductions on your federal return, Colorado generally allows you to do the same. If you take the standard deduction federally, you take it on your Colorado return too. Colorado does not allow a separate state-level deduction; it uses the federal framework as its starting point and then applies state-specific rules for capital gains and certain other items.
Reciprocal tax agreements with neighboring states
Colorado has reciprocal tax agreements with Arizona, New Mexico, Nebraska, and Utah. These agreements mean that if you live in one of these states and work in Colorado, you may not owe Colorado income tax on your wages — instead, you owe tax to your home state. The reverse is also true: if you live in Colorado and work in one of these states, you typically owe tax to that state, not Colorado.
To claim the reciprocal agreement, you must file a Certificate of Nonresidence with your Colorado employer, and your employer will not withhold Colorado tax from your paycheck. If you did not file the certificate and Colorado tax was withheld, you can claim a credit on your Colorado return or request a refund. The rules vary slightly by state, so check with both your home state and Colorado if you work across a border.
How Colorado income tax withholding works
If you are an employee in Colorado, your employer withholds Colorado income tax from your paycheck, similar to federal withholding. The amount depends on the W-4 form you complete and the current state tax rate. If you are self-employed, you do not have withholding; instead, you may need to make estimated tax payments to Colorado quarterly if you expect to owe more than a certain amount.
If too much tax is withheld during the year, you receive a refund when you file your return. If too little is withheld, you owe the difference when you file. You can adjust your withholding by submitting a new W-4 to your employer at any time. The Colorado Department of Revenue provides a withholding calculator on its website to help you estimate whether you are on track.
Frequently Asked Questions
Do I owe Colorado tax if I moved there mid-year?
Yes, but only on income earned while you were a Colorado resident. You file Form 104-EP as a part-year resident and report only the income from the date you moved to Colorado through December 31. You may also owe tax to your previous state on income earned before you moved, depending on that state's rules.
What if I work remotely for a company outside Colorado but live in Colorado?
You owe Colorado tax on those wages because you are a Colorado resident. The location of your employer does not matter. Your employer may not know to withhold Colorado tax, so you may need to adjust your withholding or make estimated payments to avoid owing at tax time.
Are Social Security benefits taxed by Colorado?
No. Colorado does not tax Social Security benefits, even if you are required to include them on your federal return. This is one of the few income types Colorado excludes from taxation.
Can I deduct federal income tax paid on my Colorado return?
No. Colorado does not allow a deduction for federal income tax paid. You can deduct state and local taxes (SALT) on your federal return, but not the reverse.
What happens if I do not file a Colorado return when I should?
The Colorado Department of Revenue can assess penalties and interest on unpaid tax. If you filed late, penalties typically start at 5% of the unpaid tax and increase the longer you wait. If you owe but cannot pay in full, you can request a payment plan with the state.