If you’re looking for a retirement destination that combines stunning natural scenery, world-class skiing, and a relatively low tax burden, the mountainous state of Colorado may be just what you’re looking for.
Between blue skies, four seasons, and low humidity, the weather in Colorado can generally be considered pretty darn good for retirees. With statehood being 100 years after the signing of the nation’s Declaration of Independence, Colorado’s nickname became the “Centennial State.” Colorado is also called “Colorful Colorado,” presumably because of our magnificent scenery of mountains, rivers, and plains.
With somewhat generous state tax deductions for retirees and some of the lowest property taxes in the nation, Colorado offers seniors the chance to stretch their retirement dollars further. But is it far enough? In this blog, we’ll explore some of the reasons why Colorado has become such a popular retirement destination and what you need to know if you’re considering making the state your retirement home.
Continue reading to see if Colorado is the right place for you to spend your golden years.
Is Colorado Retirement Right For You?
With a growing number of Americans reaching retirement age, it’s common to contemplate which states offer the most advantageous tax policies for retirees. Among the states that frequently arise in these conversations is Colorado. Colorado not only boasts various tax benefits, but it also provides an ideal setting for active seniors to relish the rewards of their hard work in the great outdoors.
What’s more, the Centennial state income tax system allows for a generous deduction of up to $24,000 per year on all retirement income for those age 65 or older. For individuals aged between 55 and 64, the deduction offered is slightly lower, but still at a substantial $20,000 per year.
Even though sales tax rates are low (the lowest non-zero state-level sales tax is in Colorado, which has a rate of 2.9 percent.), seniors can take further advantage of exemptions on items like groceries and medicine. With all of this considered, let’s take a deeper look into all things tax-related.
Colorado Social Security
Social Security benefits can be taxable in Colorado, but only above a certain level of income. Colorado allows a retirement income deduction of up to $20,000 annually for individuals aged 55 to 64 and up to $24,000 annually for individuals aged 65 and above. Individuals with Social Security income of up to $20,000 or $24,000 (depending on their age) would not need to pay income taxes on that amount in Colorado.
However, if an individual’s Social Security income exceeds the applicable deduction amount, the excess amount may be subject to state income tax. Other types of retirement income, such as pensions and IRA distributions, may also be subject to taxation in Colorado, depending on the individual’s income level.
Colorado Sales Tax
Sales tax can also be a considerable factor for retirees, especially if they plan to purchase a lot of taxable goods in retirement. In Colorado, the state sales tax rate is 2.9%, which is lower than the national average of 7.77%. However, local sales taxes can add to the overall tax burden, so it’s worth researching the specific area you plan to retire in. For example, even though Colorado has a state sales tax of 2.9%, it allows local governments to collect a local option sales tax of up to 8%. Combined with the state sales tax, the highest combined sales tax rate in Colorado is 11.2% in the city of Winter Park, the lowest being Kiowa and Cheyenne County. The state average combined Sales Tax is 7.016%
There are also sales tax exemptions to take advantage of in Colorado. Here are some examples of items that are taxed and tax exempt:
- Groceries: Exempt
- Residential Energy Usage – all gas, electricity, coal, wood and fuel oil: Exempt
- Clothing: Taxable
- Motor Vehicles: Taxable
- Prescription Drugs: Exempt
- Medical Equipment & Medicine: Exempt
Colorado Property Tax
Property taxes are another key consideration for retirees, as they can be a significant expense for homeowners. In Colorado, property taxes are low compared to other states. In fact, from lowest property taxes to highest, Colorado is impressively ranked number three (joint third with Nevada in some estimates) out of the fifty states.
The median property tax in Colorado is $1,437.00 per year for a home worth the median value of $237,800.00. Counties in Colorado collect an average of 0.6% of a property’s assessed fair market value as property tax per year. The exact property tax levied depends on the county in Colorado the property is located in. Douglas County collects the highest property tax in Colorado, levying an average of $2,590.00 (0.76% of median home value) yearly in property taxes, while Costilla County has the lowest property tax in the state, collecting an average tax of $317.00 (0.3% of median home value) per year.
But there’s further good news for those wanting to retire in Colorado; A property tax exemption is available for senior Colorado residents or surviving spouses, provided they meet the requirements.
Senior Property Tax Exemption
In Colorado, the senior property tax exemption is a type of property tax relief that’s accessible to elderly homeowners who reside in their own homes. The exemption comprises 50% of the initial $200,000 in home value. For instance, if a property is valued at $100,000, $50,000 of that value will be exempt from property tax.
However, if a house is appraised at $400,000, only $100,000 will qualify for the exemption. The eligibility requirements mandate that an individual must be aged 65 or above, and the home must have served as their primary residence for a minimum of ten consecutive years.
The application deadline to apply for the Senior Exemption is July 15, 2023. Applications are available from January 1, 2023 through July 15, 2023. Learn more about the program and how to apply here.
Coloradans Vote to Limit Tax Deductions for the Wealthy
By a greater than 10% margin, Colorado voters passed Proposition FF which limits the standard and itemized deductions for individuals making more than $300,000.
Effective since January 1, 2023, single filers are limited to $12,000 and joint filers are limited to $16,000 of deductions. The current standard deduction in Colorado is $12,950 for singles and $25,950 for joint filers. As such, all individuals with incomes over $300,000 will be subject to deduction limitations. Proposition FF was passed by voters 55.3% to 44.7% and it is anticipated that this provision will increase state revenues by over $100M.
Colorado’s prior deduction limit only applied to itemized deductions in excess of $30,000 if single and $60,000 if filing jointly, and only applied to taxpayers with incomes in excess of $400,000.
While Colorado may not be the most tax-friendly state for retirees, it does offer a number of tax-advantages and incentives. The state also has a relatively low cost of living compared to some other states, which can help stretch retirement savings further.
Overall, the relatively low income tax rate (combined with the deductions available for Social Security benefits and property taxes), can make a big difference in retirees’ overall tax burden and retirement expenses.
We understand this can be a lot of information to remember and tax rules change frequently. In order to stay up to date, it’s best to consult a professional Fiduciary advisor to guide you through the ins and outs of the Colorado tax system.
APO Financial is a retirement income planning firm based in Colorado (with office locations in Westminster, Longmont and Lone Tree, CO) that offers a wide range of services to help individuals plan for their retirement. With decades of combined experience in the industry, our team of Fiduciaries understand the importance of a well-rounded retirement plan and can guide you through the entire retirement planning process; including tax minimization strategies.
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