Does Colorado Have an Inheritance Tax?
Understand Colorado's stance on inheritance taxes and how federal estate tax and beneficiary tax rules might still apply to inherited assets.
Colorado does not impose an inheritance tax on assets transferred from a deceased individual’s estate. This means beneficiaries in Colorado do not pay a state-level tax on the act of receiving inherited property. While state-specific inheritance taxes are absent, other tax considerations may arise depending on the value and type of assets involved.
Colorado’s Stance on Inheritance and Estate Taxes
Colorado currently does not levy an inheritance tax, which is a tax directly on the beneficiaries receiving assets from a deceased person. Only a few states in the United States impose an inheritance tax, and Colorado is not among them.
Furthermore, Colorado does not impose a state-level estate tax. An estate tax is levied on the deceased person’s estate before assets are distributed to heirs. Historically, Colorado did have an inheritance tax, enacted in 1927, which was later replaced by a state estate tax in 1980.
The Colorado estate tax was tied to a federal “state death tax credit,” which allowed states to collect a portion of the federal estate tax. Federal legislative changes phased out this credit between 2002 and 2004, and it was ultimately eliminated in 2005. Since then, Colorado has not reinstated a state-level estate tax, meaning that for individuals dying after December 31, 2004, there is no state-specific estate tax imposed by Colorado.
Federal Estate Tax Considerations
The federal estate tax is a tax on the right to transfer property at death. This tax is levied on the decedent’s entire estate, applying to the fair market value of all assets owned or controlled by the deceased at the time of death, which can include real estate, securities, cash, and retirement accounts.
Most estates do not incur federal estate tax liability because the tax only applies to estates exceeding a very high exemption threshold. This threshold is adjusted annually for inflation. For example, in 2025, the exemption amount for an individual is over $13 million, with married couples able to combine their exemptions. Only a small percentage of estates in the United States are large enough to be subject to this tax.
The tax rate for the federal estate tax can range from 18% up to 40% for the portion of the estate that exceeds the exemption amount. The responsibility for filing the federal estate tax return, Form 706, and paying any taxes due falls to the executor or personal representative of the estate. This tax is paid from the assets of the estate before any remaining property is distributed to the heirs.
Tax Implications for Beneficiaries Receiving Inherited Assets
Beneficiaries generally do not pay federal or state income tax on the direct receipt of an inheritance, whether it is cash, real estate, or investments. However, any income generated by these inherited assets after the beneficiary receives them is subject to income tax. For instance, rental income from an inherited property, dividends from inherited stocks, or interest from an inherited bank account would all be taxable to the beneficiary.
The tax treatment of inherited retirement accounts, such as traditional IRAs or 401(k)s, differs. Since contributions to these accounts were made with pre-tax dollars, distributions taken by the beneficiary are generally subject to income tax. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 changed the rules for most non-spousal beneficiaries, requiring them to withdraw all funds from inherited accounts within 10 years of the original account owner’s death. Spousal beneficiaries often have more flexible options, including rolling the inherited funds into their own retirement accounts. In contrast, inherited Roth IRAs and Roth 401(k)s are generally tax-free upon withdrawal, provided certain conditions are met, because contributions to these accounts were made with after-tax dollars.
When beneficiaries sell inherited property, such as real estate or stocks, capital gains tax implications arise. The “step-up in basis” rule generally adjusts the cost basis of an inherited asset to its fair market value on the date of the decedent’s death. This adjustment can reduce potential capital gains tax liability for the beneficiary, as they often avoid paying tax on any appreciation that occurred before the original owner’s death. If the beneficiary sells the asset for more than its stepped-up basis, any further appreciation beyond that new basis would be subject to capital gains tax. Inherited retirement accounts do not receive this step-up in basis.