Colorado taxpayers won’t have to pay federal income taxes on their state refunds this filing season, according to two elected officials, after the IRS resolved uncertainty surrounding that issue — at least for now.
U.S. Sen. Michael Bennet and Gov. Jared Polis confirmed the Internal Revenue Service’s decision during a Tuesday meeting with IRS representatives, their offices told The Denver Post. That means Coloradans will not need to report any state refunds issued under the Taxpayer’s Bill of Rights, or TABOR, as income when they file their taxes in the coming months.
The IRS last year raised the specter that Colorado tax refunds, and payments issued by some other states, could be treated as taxable income for many taxpayers — a move that would break with decades of precedence and raised the ire of the state’s entire Congressional delegation.
TABOR, a voter-passed amendment to the state Constitution, requires the state to refund tax money collected beyond a threshold determined based on population growth and inflation. Coloradans have seen record refunds in recent years, culminating in $750-per-taxpayer checks sent out in 2022. That refund normally would have gone out in 2023, but lawmakers accelerated the timeline in the lead-up to the election.
The early refunds, branded as the “Colorado Cash Back,” resulted in much less money being sent out as tax refunds in 2023, though some taxpayers received their refunds later than others.
That program also caught the glare of the federal taxing agency as it considered if the payments could be considered taxable income. The tax applicability likely would have applied to people who itemize their deductions and also deduct state and local general sales taxes, state officials have said.
The agency so far has punted on making a long-term determination about the tax status of the refunds.
Karen Connelly, an IRS spokesperson, did not have an immediate comment Tuesday on the decision not to consider the refunds taxable for the current filing season.
Coloradans can expect another record refund — this time at a flat $800 per taxpayer — when they file their taxes this year, though it will be paid out through the normal tax-filing process, not through direct checks.
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