Businesses and high-income taxpayers should begin assessing the impact of Colorado’s new graduated income tax structure, which takes effect in 2027.
Colorado voters approved Amendment 87, replacing the state’s 4.4% flat income tax with graduated rates ranging from 3.7% to 8.4%. Higher rates begin on taxable income above $500,000, with the top marginal rate applying to income above $1 million.
The new structure applies to individuals and business profits. Taxpayers with income above $500,000 would be taxed at 7.4% and 8.4% on income in excess of $1 million beginning in 2027.
Importantly, the new rates are marginal. Only income within a higher bracket is taxed at that rate, not all of a taxpayer’s income.
What Taxpayers Should Consider
The change may be particularly important for high-income individuals, pass-through business owners and taxpayers anticipating a significant transaction or income event.
Affected taxpayers should consider:
Modeling 2027 Colorado tax liability, particularly when taxable income is expected to exceed $500,000.
Reviewing the timing of significant transactions, including business sales and other events that could substantially increase taxable income.
Evaluating pass-through entity implications, including how Colorado’s pass-through entity tax election may interact with the new rate structure.
Revisiting estimated tax and cash-flow planning ahead of the 2027 effective date.
Monitoring Colorado guidance as the state implements the new system.
How UHY Can Help
For businesses and their owners, the impact of Colorado’s new tax structure will depend on income, entity structure, ownership and the timing of significant transactions.
A business sale or other large income event, for example, could push a taxpayer into substantially higher Colorado marginal rates. Pass-through entities and their owners should also evaluate how the new structure affects existing state and federal tax planning strategies.
UHY’s State and Local Tax professionals can help taxpayers model the potential impact of the new rates, evaluate pass-through and transaction considerations, and identify planning opportunities before the changes take effect. Contact your UHY advisor to discuss how the new Colorado tax structure may affect you or your business.
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