Colo. Code Regs. 39-22-108

Current through Register Vol. 47, No. 20, October 25, 2024

Rule 39-22-108 - Credit For Taxes Paid to Another State

Basis and Purpose. The statutory bases for this rule are sections 39-21-112(1), 39-21-113(1)(c), 39-22-103(11), 39-22-104, 39-22-105, 39-22-108, 39-22-109, 39-22-110, 39-22-202(4), and 39-22-329(1), C.R.S. The purpose of this rule is to provide clarification regarding the credit for taxes paid to other states and to explain the application of section 39-22-108, C.R.S., and the various elements thereof. This rule details the taxes, income, and limitations considered in determining the allowable credit for both full-year residents and part-year residents. The rule also prescribes certain requirements relating to any necessary correction in the amount of credit claimed and the documentation of state taxes paid.

(1)General Rule. Subject to the limits prescribed in section 39-22-108, C.R.S., and this rule, a resident individual, estate, or trust is allowed a credit for the amount of net taxes on federal taxable income accrued to another state on income derived from sources in that state.

(2)Qualifying Taxes.

(a)State Taxes. The credit is allowed only for taxes accrued to another state, the District of Columbia, or a territory or possession of the United States. As used in this rule, unless context otherwise requires, the term "state" includes another state of the United States, the District of Columbia, and any territory or possession of the United States. The credit is not allowed for taxes accrued to any city, local jurisdiction, foreign country, or any subdivision thereof.

(b)Taxes on Income. The credit is allowed only for taxes imposed on income. The credit is allowed regardless of whether the state imposing the tax refers to it as an income tax, as a gross receipts tax, or by another name. The credit is not allowed for any franchise tax or any other tax accrued to another state that is not imposed on income.

(c)Taxes on Income Derived from Sources in Another State. The credit is allowed only for the amount of tax imposed on income derived from sources in the other state. The source from which income is derived is determined in the manner prescribed in section 39-22-109, C.R.S. Credit is not allowed for any amount of tax a state imposes based on the taxpayer's residency in that state, rather than based upon the source from which the income is derived.

(d)Amount of Qualifying Tax. The credit is allowed only for the net tax accrued. As used in this rule, unless context otherwise requires, "net tax" means the income tax imposed by a state, including any alternative minimum tax imposed by the state, minus any income tax credits allowed by the state against the income tax imposed, except for any credits allowed for estimated payments made by the taxpayer and income taxes withheld from the taxpayer's wages or other income. "Net tax" does not include any recapture required by the state for credits claimed by the taxpayer in a prior tax year.

(i)Dual-Resident Individuals. If an individual is a full-year resident of both Colorado and another state for the same tax year, that individual may claim credit only for net tax accrued to the other state on income derived from sources in the other state, determined pursuant to paragraph (2)(c) of this rule.

(e)Tax Year.

(i)Tax Accrual. The credit is allowed only for taxes accrued for the tax year. The credit may not be claimed for taxes accrued for any other tax year.

(A) For the purposes of section 39-22-202(4), C.R.S., taxes accrued by a partnership for a tax year are deemed to accrue for its partners in the partner's tax year within which the partnership's tax year ends.

(B) For the purposes of section 39-22-329(1), C.R.S., taxes accrued by an S corporation for a tax year are deemed to accrue for its shareholders in the shareholder's tax year within which the S corporation's tax year ends.

(ii)Income. The credit is allowed only for taxes on income included in the taxpayer's modified federal adjusted gross income, determined pursuant to paragraph (3)(a)(ii) of this rule, for the tax year.

(3)Limitations.

(a) For the purpose of this paragraph (3), unless context otherwise requires:

(i) "Gross Colorado tax" means the tax imposed pursuant to section 39-22-104, C.R.S., and any alternative minimum tax imposed pursuant to section 39-22-105, C.R.S., but does not include any credit recapture required pursuant to article 22 of title 39, C.R.S.

(ii) Except as otherwise provided in paragraph (4)(b) of this rule, "modified federal adjusted gross income" means the taxpayer's federal adjusted gross income modified by any additions and subtractions required by section 39-22-104, C.R.S., or any other applicable provision of article 22 of title 39, C.R.S., or under federal law, except for the following modifications:

(A) the state income tax addback required by section 39-22-104(3)(d), C.R.S.;

(B) the gross conservation easement deduction addback required by section 39-22-104(3)(g), C.R.S.;

(C) the qualified business income deduction addback required by section 39-22-104(3)(o), C.R.S.;

(D) the itemized deduction addback required by section 39-22-104(3)(p), C.R.S.;

(E) the itemized or standard deduction addback required by section 39-22-104(3) (p.5), C.R.S.;

(F) the qualified business income deduction addback required by section 39-22-104(3)(r), C.R.S.; and

(G) the charitable contribution subtraction allowed by section 39-22-104(4)(m), C.R.S.

(b)Limitation on Credit for Tax Paid to Another State. The credit allowed for tax accrued to another state is limited to the taxpayer's gross Colorado tax multiplied by a fraction, the numerator of which is the taxpayer's modified federal adjusted gross income from sources within the other state, as determined pursuant to paragraph (2)(c) of this rule, and the denominator of which is the taxpayer's entire modified federal adjusted gross income. In determining the limitation pursuant to this paragraph (3)(b), all of the taxpayer's income, gains, and losses from sources within the other state are considered. A taxpayer's modified federal adjusted gross income from sources within another state shall be determined without regard to any additions made on the taxpayer's income tax return filed for that state, except to the extent that such addition is similarly required in determining the taxpayer's modified federal adjusted gross income as defined in paragraph (3)(a)(ii) of this rule.

(c)Limitation on Total Credit for Taxes Paid to All Other States. The total credit allowed for taxes accrued to all other states is limited to the taxpayer's gross Colorado tax multiplied by a fraction, the numerator of which is taxpayer's modified federal adjusted gross income from sources outside of Colorado, as determined pursuant to paragraph (2)(c) of this rule, and the denominator of which is the taxpayer's entire modified federal adjusted gross income. In determining the limitation pursuant to this paragraph (3)(c), all of the taxpayer's income, gains, and losses from sources outside of Colorado are considered.

(4)Part-Year Residents. Subject to the limits prescribed in section 39-22-108, C.R.S., and this rule, an individual, estate, or trust that is a Colorado resident for only part of the tax year (a "part-year resident") is allowed a credit only for the amount of net taxes accrued to another state on income derived from sources in that state while the taxpayer was a Colorado resident.

(a)Tax Accrual. A part-year resident can claim credit only for tax accrued to another state while the taxpayer was a Colorado resident. If the taxpayer accrued tax to the other state during both the part of the year that the taxpayer was a Colorado resident and the part of the year that the taxpayer was not a Colorado resident, the total net tax accrued to the other state for the tax year shall be prorated to determine the amount of credit the part-year resident may claim. The total net tax accrued to the other state shall be prorated by multiplying by a fraction in which:

(i) the numerator is the part of the total amount of income taxed by the other state for the tax year that is derived from sources in that state while the taxpayer was a Colorado resident; and

(ii) the denominator is the total amount of income taxed by the other state for the tax year.

(b)Modified Adjusted Gross Income. For the purpose of determining the limitations under paragraph (3) of this rule for a part-year resident:

(i) only that part of the part-year resident's modified federal adjusted gross income that relates to the period of the year they were a Colorado resident, as determined pursuant to section 39-22-110, C.R.S., is considered and included in the denominator of the fraction described in paragraphs (3)(b) and (3)(c) of this rule; and

(ii) only that part of the denominator determined pursuant to paragraph (4)(b)(i) of this rule that is income derived from sources in the other state is considered and included in the numerator of the fraction described in paragraphs (3)(b) and (3)(c) of this rule.

(c)Example.

(i)Residency. The taxpayer is a resident of State A from January 1 through June 30 and a resident of Colorado from July 1 through December 31 of the tax year.

(ii)Income. The taxpayer has wage income and rental income included in their federal taxable income for the tax year.

(A)Wage Income. The taxpayer earned:

(I) a total of $48,000 of wage income during the tax year;

(II) $6,000 of wage income while working in State A between January 1 and June 30, while they were a State A resident; and

(III) $42,000 of wage income while working in Colorado between July 1 and December 31, while they were a Colorado resident.

(B)Rental Income. The taxpayer realized $12,000 of rental income from real property located in State A. The rental income was received evenly throughout the year, with $1,000 of rental income realized during each month of the tax year.

(C)Federal Taxable Income. The taxpayer had $60,000 of federal adjusted gross income and $15,000 of federal deductions, resulting in federal taxable income of $45,000.

(iii)State A Income and Tax. State A imposed tax on the $18,000 of the taxpayer's income for the tax year, consisting of the $6,000 of wage income earned in State A while they were a State A resident and $12,000 of rental income from real property in State A, realized over the course of the entire year. The taxpayer accrued $900 of State A tax on the $18,000 of income taxed by the state.

(iv)State A Tax Attributable to Income Derived from the State During Colorado Residency. Pursuant to paragraph (4)(a) of this rule, the tax accrued to State A while the taxpayer was a Colorado resident is $300, determined by multiplying the $900 of total State A tax accrued by a fraction in which:

(A) the numerator is the $6,000 of State A rental income taxed by State A and realized by the taxpayer while they were a Colorado resident; and

(B) the denominator is the entire $18,000 of income taxed by State A.

(v)Gross Colorado Tax. The taxpayer's gross Colorado income tax for the tax year is $1,584.

(A) Pursuant to section 39-22-104, C.R.S., the taxpayer's Colorado tax is tentatively calculated on the taxpayer's full federal taxable income by multiplying their $45,000 federal taxable income by the 4.4% Colorado income tax rate applicable for the tax year, resulting in $1,980.

(B) Pursuant to section 39-22-110, C.R.S., the taxpayer's gross Colorado tax is then determined by multiplying the $1,980 of tentatively calculated tax by an apportionment percentage of 80%, resulting in gross Colorado tax of $1,584. The 80% apportionment limitation is calculated by dividing the $48,000 of the taxpayer's federal adjusted gross income that relates to the period of the year in which they were a Colorado resident by the taxpayer's full federal adjusted gross income of $60,000.

(vi)Credit Limitation. The credit the taxpayer may claim for taxes paid to State A is limited to $198, determined as follows.

(A)Total Modified Adjusted Gross Income Considered. Pursuant to paragraph (4)(b)(i) of this rule, only the $48,000 of income that relates to the period while the taxpayer was a Colorado resident is considered and included in the denominator of the fraction used to calculate the credit limitation. The $48,000 of income included in the denominator consists of the $42,000 of wage income earned while working as a Colorado resident and the $6,000 of rental income realized while the taxpayer was a Colorado resident.

(B)Total Modified Adjusted Gross Income Considered from State A Sources. Pursuant to paragraph (4)(b)(ii) of this rule, the numerator used to calculate the credit limitation is the $6,000 of rental income realized from State A sources that was included in the total modified adjusted gross income considered pursuant to paragraphs (4)(b)(i) and (4)(c)(vi)(A) of this rule.

(C)Credit Limitation. The credit the taxpayer can claim for tax paid to State A is limited to $198. Pursuant to paragraphs (3)(b) and (4)(b) of this rule, the taxpayer's $1,584 gross Colorado tax is multiplied by a fraction, the numerator of which is taxpayer's $6,000 of State A rental income realized while the taxpayer was a Colorado resident and the denominator is the $48,000 of total modified adjusted gross income considered pursuant to paragraphs (4)(b)(i) and (4)(c)(vi)(A) of this rule.

(5)Redeterminations. In accordance with section 39-22-108(3), C.R.S., if the tax ultimately paid to the other state differs from the amount of tax for which a taxpayer claimed credit or if any part of the tax paid is refunded, the taxpayer must notify the Department by filing an amended return to correct the amount of the credit claimed. Additionally, a taxpayer must file an amended return to make any necessary corrections to the modified federal adjusted gross income from sources in other states reported on the taxpayer's return in calculating the allowable amount of the credit.

(6)Documentation. Any taxpayer claiming a credit under section 39-22-108, C.R.S., and this rule must submit to the Department with their Colorado return the documentation required by this rule. Any taxpayer claiming a credit must also provide on request any additional documentation the Department determines is necessary to verify the credit claimed by the taxpayer.

(a) A taxpayer claiming a credit for taxes determined and reported on a return the taxpayer filed with another state must submit with their Colorado return a copy of the return filed with the other state or so much of the return as is relevant to the determination of the credit.

(b) If another state imposes income tax on a pass-through entity (a partnership or S corporation), or a pass-through entity files a composite return with a state on behalf of its members (its partners or shareholders), any Colorado resident member claiming credit on their Colorado return for their distributive or pro rata share of the tax must submit with their Colorado return a copy of the statement provided by the pass-through entity reporting the member's distributive or pro rata share of the tax and the income derived from sources in that state.

39-22-108

Colorado Register, Vol 37, No. 14. July 25, 2014, effective 8/14/2014

37 CR 18, September 25, 2014, effective 10/15/2014

37 CR 19, October 10,2014, effective 10/30/2014

37 CR 22, November 25, 2014, effective 12/16/2014

38 CR 04, February 25, 2015, effective 3/17/2015

38 CR 07, April 10, 2015, effective 4/30/2015

38 CR 11, June 10, 2015, effective 6/30/2015

38 CR 22, November 25, 2015, effective 12/15/2015

38 CR 24, December 25, 2015, effective 1/14/2016

38 CR 24, December 25, 2015, effective 1/19/2016

39 CR 01, January 10, 2016, effective 1/30/2016

39 CR 16, August 25, 2016, effective 9/14/2016

40 CR 08, April 25, 2017, effective 5/15/2017

40 CR 12, June 25, 2017, effective 7/15/2017

40 CR 16, August 25, 2017, effective 9/14/2017

40 CR 23, December 10, 2017, effective 1/1/2018

41 CR 14, July 25, 2018, effective 8/14/2018

41 CR 20, October 25, 2018, effective 11/14/2018

42 CR 02, January 25, 2019, effective 12/18/2018

42 CR 02, January 25, 2019, effective 12/18/2018, expires 4/17/2019

42 CR 06, March 25, 2019, effective 4/14/2019

43 CR 04, February 25, 2020, effective 3/16/2020

43 CR 13, July 10, 2020, effective 6/2/2020

43 CR 17, September 10, 2020, effective 9/30/2020

44 CR 03, February 10, 2021, effective 3/2/2021

44 CR 07, April 10, 2021, effective 4/30/2021

44 CR 08, April 25, 2021, effective 5/15/2021

45 CR 01, January 10, 2022, effective 1/30/2022

45 CR 04, February 25, 2022, effective 3/17/2022

45 CR 05, March 10, 2022, effective 3/30/2022

46 CR 11, June 10, 2023, effective 5/2/2023

46 CR 09, May 10, 2023, effective 5/30/2023

46 CR 23, December 10, 2023, effective 12/30/2023