Colorado Estate Tax: The Ultimate Guide [Step by Step]

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Paul Sundin, CPA

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Do you live in Colorado? Maybe someone has passed away and is concerned about Colorado estate tax? In this post, we answer some critical questions regarding Colorado taxation..

Let’s start off by saying I have some good news for you. Colorado is one of 38 states that does not have an estate tax. It does not matter the size of your estate nor what type of assets you have. There is no tax assessed.

Colorado estate tax planning

So you are aware that there is no estate tax in Colorado. Some states have decided to recently enact statutes to tax estates based on a certain exemption amount. But even though Colorado does not have an exemption, the federal government may assess tax against your estate.

What is an estate tax and how does it work?

The estate tax is assessed on a specified estate once a person has passed away. It does not get assessed against the beneficiaries, it is assessed against the estate before money is passed to any heirs. Some people refer to it as a death tax.

If your loved one passed away without leaving any financial assets, you should have your estate prepared for the Colorado estate tax. The law states that the personal representative of the deceased will be responsible for paying this tax.

Typically, the estate will consist of both real and personal property. You will pay this tax after the person passes away. If you have a significant estate, you should make sure to make all of the necessary arrangements to minimize your liability.

In Colorado, you can’t pass on any assets to your spouse unless the spouse has paid the tax. The personal representative must pay the estate taxes, and any amount that isn’t recoverable must be apportioned among other beneficiaries.

The personal representative must apportion estate taxes. If you do not have any assets that qualify for the exemption amount, the personal representative must give security to the distributee.

The distribution agent must specify the form and amount of the bond. It is important to keep in mind that a person may not be able to pay the entire amount of taxes if they do not receive a specific exemption. In addition, beneficiaries of the estate are not required to pay income tax on inherited property.

Colorado gift tax and inheritance tax

In addition to having no estate tax, Colorado also has no gift tax or inheritance tax. Some states do assess inheritance tax if the decedent passes away in a specific state even if the beneficiaries live in a different state. So be careful if assets are owned in multiple states.

The federal government does have a gift tax, but no inheritance tax. The good news is that federal gift tax has an annual exclusion. As long as the gift amount is below the threshold, there is no gift tax return filing. 

Federal estate tax

The federal government has an estate tax when the estate meets a certain exemption level. If the estate has not met the exemption, there is no tax filing to be made and no tax to be assessed. But be careful because estate tax thresholds and exemptions will change on an annual basis. So make sure you track it and do some planning in advance.

Taxes written on hanging tags

The good news is you have some planning options. These include estate tax strategies that can be done prior to the date of death and even after the persons date of death. These strategies can include valuation issues relating to specific assets and even charitable donations and certain administrative expenses.

The most important part of trust taxation is understanding the rules of income taxation. While a trust is treated just like any other business entity, its income is not subject to ordinary income taxes.

In most cases, the income is taxed only to the grantor, not to the beneficiary. This is true even if the beneficiaries do not have any personal assets. In some cases, the trust may receive income that is not taxable.

A trust may be taxed in two ways. The beneficiaries of the trust must pay taxes on the income received from the trust. But when they receive money from the principal of the trust, they don’t have to pay taxes on it.

This means that the beneficiary avoids double taxation, as the money that is in the principal of the estate has already been taxed. In other words, the beneficiary is not taxed on the income that comes out of the trust while it is in the trust.

Another way to avoid taxes in a trust is to avoid paying taxes yourself. There are several ways to pay taxes and keep your money out of the hands of the IRS. By establishing a trust, you can save yourself from paying unnecessary tax bills.

You can also delegate the tax burden to a third party, if you choose to. This way, you can be sure that your loved ones are not paying taxes they don’t owe.

Final thoughts

Colorado is generally a fairly tax friendly state. Social Security and certain retirement accounts are taxed in part. But Colorado has a flat income tax rate. There are also in fact three cities in Colorado that assess a local income tax so make sure you check on your specific city.

Property taxes in Colorado are definitely on the low end. They will average around half of 1% of assessed value. State wide sales tax in Colorado is limited to 2.9%. But when you add any local taxes they can get up closer to 8%.

Estate tax can be very complicated. Make sure you have engaged an attorney or CPA to limit any tax that you have to pay.

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