How to Claim the Colorado Credit for Taxes Paid to Another State
For Colorado residents with out-of-state income, this guide explains how the credit for taxes paid to another state functions to prevent double taxation.
Colorado residents who earn income in another state may be subject to income tax in both jurisdictions, creating double taxation. To alleviate this burden, Colorado offers a tax credit for income taxes paid to another state. This credit directly reduces a taxpayer’s Colorado tax liability, ensuring that they are not unfairly penalized for earning income across state lines.
Eligibility for the Credit
To qualify for this tax credit, a person must be a full-year Colorado resident for the entire tax year. The credit is not available to nonresidents, as their Colorado tax is calculated only on income from Colorado sources. Part-year residents might qualify in limited circumstances where income was earned in another state while they were a Colorado resident and that income is also subject to Colorado tax.
The type of tax paid to the other state is a determining factor for eligibility. The credit is only allowed for state-level, net income tax. This means taxes that are based on a taxpayer’s overall income, less allowable deductions, are eligible. For example, a Colorado resident who pays another state’s individual income tax on their wages qualifies for the credit.
Conversely, many other types of taxes paid to other states or their local governments are not eligible. The credit cannot be claimed for city or county income or occupational taxes, which are levied by municipal authorities. Other ineligible taxes include sales taxes, property taxes on real estate owned in another state, and severance taxes.
The income must also be properly sourced to the other state according to that state’s specific laws. This means the income must be classified as earned within that state’s borders. For instance, wages are sourced to the location where the work is physically performed, and income from a rental property is sourced to the state where the property is located.
Calculating the Allowable Credit
The credit for taxes paid to another state is not a dollar-for-dollar reimbursement. The allowable credit is strictly limited and is calculated as the lesser of three specific amounts:
- The actual tax liability paid to the other state on the doubly-taxed income.
- The amount of Colorado tax due on that same income.
- The taxpayer’s total Colorado tax liability for the year.
To begin the calculation, a taxpayer must determine the actual net income tax paid to the other state. This figure is found on the completed tax return for that other state. It is not the amount of tax withheld from paychecks, but the final, calculated tax liability after all deductions and credits specific to that state have been applied.
Next, the taxpayer must calculate the portion of their Colorado tax that is attributable to the income from the other state. This involves a specific formula found on Colorado’s Form DR 0104CR. The taxpayer will divide their modified adjusted gross income from the other state’s sources by their total modified Colorado adjusted gross income and multiply the result by the total Colorado tax liability.
Finally, these two figures are compared. For example, assume a taxpayer paid $1,000 in income tax to another state. After performing the calculation, they determine that the Colorado tax on that same income is $800. In this scenario, the allowable credit would be limited to $800, because that is the smaller of the two amounts. The credit is also capped by the total Colorado tax liability for the year and cannot result in a refund.
How to Claim the Credit
Once a taxpayer has confirmed their eligibility and calculated the correct credit amount, the final step is to formally claim it on their Colorado income tax return. The claim must be substantiated with the proper forms and documentation.
The central document for this process is Colorado Form DR 0104CR, the Credit for Tax Paid to Another State schedule. This form guides the taxpayer through the official calculation and must be completed in its entirety. The final, allowable credit amount is entered on the designated line of this form.
After completing Form DR 0104CR, the calculated credit amount is transferred to the main Colorado Individual Income Tax Return, Form DR 0104. There is a specific line on Form DR 0104 for nonrefundable credits, and this is where the figure from Form DR 0104CR is entered. This entry directly reduces the total tax due to Colorado.
A complete and signed copy of the other state’s income tax return must be attached to the Colorado return. This attachment is mandatory proof that the tax was actually paid. The submitted portion of the other state’s return must clearly show the income calculation and the final tax liability. Failure to attach this documentation will result in the denial of the credit.