Colorado Estate Tax: Do I Need to Worry?

Colorado Inheritance Tax: What You Need to Know

We spend time every year trying our best to minimize our tax liability. Do we also have to worry about taxes on our estate after we pass away. What about in the event we will be inheriting from an estate? The answer will depend on the value of the estate. You should always discuss your concerns directly with an experienced estate planning lawyer in Colorado. They can help you evaluate your specific situation.

Generally, you do not have to report Colorado inheritance tax to the IRS. This is because it’s typically not considered taxable income at the federal level. However, estate assets may generate income before they are distributed. Thus, a tax return filed may be required. And/or beneficiaries may have to report such income on their personal returns.

An inheritance tax is paid by the person inheriting assets in certain states. Unlike estate taxes, inheritance tax applies to the size of the individual gift or inheritance. Not the size of the decedent’s entire estate as a whole. Inheritance tax rates vary based on a beneficiary’s relationship to the decedent and in some jurisdictions, the amount inherited.

Does Colorado Have An Inheritance Tax?

The good news is that Colorado does not have an inheritance tax. In fact, only six states have state-level inheritance tax. Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

However, if the decedent lived in a state that does have inheritance tax, or the assets you are inheriting are located in a state with inheritance tax, then there may be a tax obligation regardless of the laws of the state in which you live. In other words, it’s the decedent’s state tax laws, and potentially the tax law of the state where property is located that apply, not the laws of the state in which the heir/beneficiary lives.

To reiterate, inheritance tax is different from estate tax. It is important to understand how estate taxes work and whether they might apply to your estate. So what is estate tax?

What is a Colorado Estate Tax?

An estate tax is a tax levy imposed on an estate based on the value of its assets. While an inheritance tax and estate tax may appear one and the same, Colorado estate tax is applied based on the value of the estate as a whole, whereas inheritance tax is applied to each distribution or inheritance. Moreover, the person inheriting assets is the one who pays any inheritance tax. The estate itself is responsible for any estate tax due. Estate taxes are generally paid prior to distribution of assets. Although only twelve states have estate taxes at the state level, all estates may be subject to being taxed at the federal level. What this means is that regardless of which state you reside in, if your estate exceeds a certain value, estate taxes may be due federally.

In most cases, only estates with a very high value are subject to Colorado estate taxes. It’s very likely that you won’t have to pay them. But there are some exceptions to this. The specifics of the estate may dramatically change your tax bill.

Colorado estate tax applies whether the property is transferred through a will or according to Colorado intestacy laws. While federal law still imposes estate taxes on certain estates, only about two of every 1,000 people who pass away – or 0.2 percent – have to pay any taxes at all.

Federal Estate Tax Exemptions For 2022:

The following are the federal estate tax exemptions for 2022:

  • Individuals can exempt up to $11.7 million
  • Married couples can exempt up to $23.4 million
  • The annual gift exclusion is $15,000

These values may also be impacted by gifts that you make during your lifetime. The right estate planning lawyer can help to evaluate your situation. They can help you plan ahead to minimize or eliminate your estate tax liability. You can you get all of your bases covered and ensure that your wishes are properly carried out. An estate planning attorney can also help you implement effective strategies to protect and pass your assets on to your heirs.

While you may or may not have to worry about estate taxes this year, the increased exemptions expire in 2025. Federal law governing these exemptions is constantly evolving, too. The exemption limit may very well decrease in the years to come, which may affect many more estates. It is important to consult an estate planning attorney who is knowledgeable about the current and anticipated laws and their implications, and how to plan accordingly.

So What Is Colorado Death Tax?

The term “death tax” is commonly used by tax-reduction advocates. But there is no state or federal tax that is officially called a “death tax.” “Death tax” is a play on words with political connotations. There is no Colorado death tax on the state or federal level imposed simply because of a death. Typically, when someone refers to a “death tax,” they are likely referring to an estate or Colorado inheritance tax, as defined above.

Contact a Colorado Estate Planning Attorney for More Information

At Brestel Bucar, we help clients plan for the future to protect their hard-earned property, as well as their beneficiaries. Even though there is no Colorado estate tax, Colorado death tax, or Colorado inheritance tax, there are still tax-related concerns for many people when it comes to estate planning. Contact us to schedule a consultation with a member of our legal team today.