39-22-108 - Credit For Taxes Paid to Another State
Basis and Purpose. The statutory bases for this rule are sections 39-21-112(1), 39-21-113(1)(c), 39-22-103(11), 39-22-104, 39-22-105, 39-22-108, 39-22-109, 39-22-110, 39-22-202(4), and 39-22-329(1), C.R.S. The purpose of this rule is to provide clarification regarding the credit for taxes paid to other states and to explain the application of section 39-22-108, C.R.S., and the various elements thereof. This rule details the taxes, income, and limitations considered in determining the allowable credit for both full-year residents and part-year residents. The rule also prescribes certain requirements relating to any necessary correction in the amount of credit claimed and the documentation of state taxes paid.
(1)
General
Rule. Subject to the limits prescribed in section
39-22-108, C.R.S., and this rule,
a resident individual, estate, or trust is allowed a credit for the amount of
net taxes on federal taxable income accrued to another state on income derived
from sources in that state.
(2)
Qualifying Taxes.
(a)
State Taxes. The credit is allowed only for taxes accrued to
another state, the District of Columbia, or a territory or possession of the
United States. As used in this rule, unless context otherwise requires, the
term "state" includes another state of the United States, the District of
Columbia, and any territory or possession of the United States. The credit is
not allowed for taxes accrued to any city, local jurisdiction, foreign country,
or any subdivision thereof.
(b)
Taxes on Income. The credit is allowed only for taxes imposed
on income. The credit is allowed regardless of whether the state imposing the
tax refers to it as an income tax, as a gross receipts tax, or by another name.
The credit is not allowed for any franchise tax or any other tax accrued to
another state that is not imposed on income.
(c)
Taxes on Income Derived from
Sources in Another State. The credit is allowed only for the amount of
tax imposed on income derived from sources in the other state. The source from
which income is derived is determined in the manner prescribed in section
39-22-109, C.R.S. Credit is not
allowed for any amount of tax a state imposes based on the taxpayer's residency
in that state, rather than based upon the source from which the income is
derived.
(d)
Amount of
Qualifying Tax. The credit is allowed only for the net tax accrued. As
used in this rule, unless context otherwise requires, "net tax" means the
income tax imposed by a state, including any alternative minimum tax imposed by
the state, minus any income tax credits allowed by the state against the income
tax imposed, except for any credits allowed for estimated payments made by the
taxpayer and income taxes withheld from the taxpayer's wages or other income.
"Net tax" does not include any recapture required by the state for credits
claimed by the taxpayer in a prior tax year.
(i)
Dual-Resident
Individuals. If an individual is a full-year resident of both Colorado
and another state for the same tax year, that individual may claim credit only
for net tax accrued to the other state on income derived from sources in the
other state, determined pursuant to paragraph (2)(c) of this rule.
(e)
Tax Year.
(i)
Tax Accrual. The credit
is allowed only for taxes accrued for the tax year. The credit may not be
claimed for taxes accrued for any other tax year.
(A) For the purposes of section
39-22-202(4),
C.R.S., taxes accrued by a partnership for a tax year are deemed to accrue for
its partners in the partner's tax year within which the partnership's tax year
ends.
(B) For the purposes of
section 39-22-329(1),
C.R.S., taxes accrued by an S corporation for a tax year are deemed to accrue
for its shareholders in the shareholder's tax year within which the S
corporation's tax year ends.
(ii)
Income. The credit is
allowed only for taxes on income included in the taxpayer's modified federal
adjusted gross income, determined pursuant to paragraph (3)(a)(ii) of this
rule, for the tax year.
(3)
Limitations.
(a) For the purpose of this paragraph (3),
unless context otherwise requires:
(i) "Gross
Colorado tax" means the tax imposed pursuant to section
39-22-104, C.R.S., and any
alternative minimum tax imposed pursuant to section
39-22-105, C.R.S., but does not
include any credit recapture required pursuant to article 22 of title 39,
C.R.S.
(ii) Except as otherwise
provided in paragraph (4)(b) of this rule, "modified federal adjusted gross
income" means the taxpayer's federal adjusted gross income modified by any
additions and subtractions required by section
39-22-104, C.R.S., or any other
applicable provision of article 22 of title 39, C.R.S., or under federal law,
except for the following modifications:
(A)
the state income tax addback required by section
39-22-104(3)(d),
C.R.S.;
(B) the gross conservation
easement deduction addback required by section
39-22-104(3)(g),
C.R.S.;
(C) the qualified business
income deduction addback required by section
39-22-104(3)(o),
C.R.S.;
(D) the itemized deduction
addback required by section
39-22-104(3)(p),
C.R.S.;
(E) the itemized or
standard deduction addback required by section
39-22-104(3)
(p.5), C.R.S.;
(F) the qualified
business income deduction addback required by section
39-22-104(3)(r),
C.R.S.; and
(G) the charitable
contribution subtraction allowed by section
39-22-104(4)(m),
C.R.S.
(b)
Limitation on Credit for Tax Paid to Another State. The credit
allowed for tax accrued to another state is limited to the taxpayer's gross
Colorado tax multiplied by a fraction, the numerator of which is the taxpayer's
modified federal adjusted gross income from sources within the other state, as
determined pursuant to paragraph (2)(c) of this rule, and the denominator of
which is the taxpayer's entire modified federal adjusted gross income. In
determining the limitation pursuant to this paragraph (3)(b), all of the
taxpayer's income, gains, and losses from sources within the other state are
considered. A taxpayer's modified federal adjusted gross income from sources
within another state shall be determined without regard to any additions made
on the taxpayer's income tax return filed for that state, except to the extent
that such addition is similarly required in determining the taxpayer's modified
federal adjusted gross income as defined in paragraph (3)(a)(ii) of this
rule.
(c)
Limitation on
Total Credit for Taxes Paid to All Other States. The total credit
allowed for taxes accrued to all other states is limited to the taxpayer's
gross Colorado tax multiplied by a fraction, the numerator of which is
taxpayer's modified federal adjusted gross income from sources outside of
Colorado, as determined pursuant to paragraph (2)(c) of this rule, and the
denominator of which is the taxpayer's entire modified federal adjusted gross
income. In determining the limitation pursuant to this paragraph (3)(c), all of
the taxpayer's income, gains, and losses from sources outside of Colorado are
considered.
(4)
Part-Year Residents. Subject to the limits prescribed in section
39-22-108, C.R.S., and this rule,
an individual, estate, or trust that is a Colorado resident for only part of
the tax year (a "part-year resident") is allowed a credit only for the amount
of net taxes accrued to another state on income derived from sources in that
state while the taxpayer was a Colorado resident.
(a)
Tax Accrual. A part-year
resident can claim credit only for tax accrued to another state while the
taxpayer was a Colorado resident. If the taxpayer accrued tax to the other
state during both the part of the year that the taxpayer was a Colorado
resident and the part of the year that the taxpayer was not a Colorado
resident, the total net tax accrued to the other state for the tax year shall
be prorated to determine the amount of credit the part-year resident may claim.
The total net tax accrued to the other state shall be prorated by multiplying
by a fraction in which:
(i) the numerator is
the part of the total amount of income taxed by the other state for the tax
year that is derived from sources in that state while the taxpayer was a
Colorado resident; and
(ii) the
denominator is the total amount of income taxed by the other state for the tax
year.
(b)
Modified Adjusted Gross Income. For the purpose of determining
the limitations under paragraph (3) of this rule for a part-year resident:
(i) only that part of the part-year
resident's modified federal adjusted gross income that relates to the period of
the year they were a Colorado resident, as determined pursuant to section
39-22-110, C.R.S., is considered
and included in the denominator of the fraction described in paragraphs (3)(b)
and (3)(c) of this rule; and
(ii)
only that part of the denominator determined pursuant to paragraph (4)(b)(i) of
this rule that is income derived from sources in the other state is considered
and included in the numerator of the fraction described in paragraphs (3)(b)
and (3)(c) of this rule.
(c)
Example.
(i)
Residency. The taxpayer
is a resident of State A from January 1 through June 30 and a resident of
Colorado from July 1 through December 31 of the tax year.
(ii)
Income. The taxpayer
has wage income and rental income included in their federal taxable income for
the tax year.
(A)
Wage
Income. The taxpayer earned:
(I) a
total of $48,000 of wage income during the tax year;
(II) $6,000 of wage income while working in
State A between January 1 and June 30, while they were a State A resident;
and
(III) $42,000 of wage income
while working in Colorado between July 1 and December 31, while they were a
Colorado resident.
(B)
Rental Income. The taxpayer realized $12,000 of rental income
from real property located in State A. The rental income was received evenly
throughout the year, with $1,000 of rental income realized during each month of
the tax year.
(C)
Federal
Taxable Income. The taxpayer had $60,000 of federal adjusted gross
income and $15,000 of federal deductions, resulting in federal taxable income
of $45,000.
(iii)
State A Income and Tax. State A imposed tax on the $18,000 of
the taxpayer's income for the tax year, consisting of the $6,000 of wage income
earned in State A while they were a State A resident and $12,000 of rental
income from real property in State A, realized over the course of the entire
year. The taxpayer accrued $900 of State A tax on the $18,000 of income taxed
by the state.
(iv)
State A
Tax Attributable to Income Derived from the State During Colorado
Residency. Pursuant to paragraph (4)(a) of this rule, the tax accrued
to State A while the taxpayer was a Colorado resident is $300, determined by
multiplying the $900 of total State A tax accrued by a fraction in which:
(A) the numerator is the $6,000 of State A
rental income taxed by State A and realized by the taxpayer while they were a
Colorado resident; and
(B) the
denominator is the entire $18,000 of income taxed by State A.
(v)
Gross Colorado
Tax. The taxpayer's gross Colorado income tax for the tax year is
$1,584.
(A) Pursuant to section
39-22-104, C.R.S., the taxpayer's
Colorado tax is tentatively calculated on the taxpayer's full federal taxable
income by multiplying their $45,000 federal taxable income by the 4.4% Colorado
income tax rate applicable for the tax year, resulting in $1,980.
(B) Pursuant to section
39-22-110, C.R.S., the taxpayer's
gross Colorado tax is then determined by multiplying the $1,980 of tentatively
calculated tax by an apportionment percentage of 80%, resulting in gross
Colorado tax of $1,584. The 80% apportionment limitation is calculated by
dividing the $48,000 of the taxpayer's federal adjusted gross income that
relates to the period of the year in which they were a Colorado resident by the
taxpayer's full federal adjusted gross income of $60,000.
(vi)
Credit Limitation. The
credit the taxpayer may claim for taxes paid to State A is limited to $198,
determined as follows.
(A)
Total
Modified Adjusted Gross Income Considered. Pursuant to paragraph
(4)(b)(i) of this rule, only the $48,000 of income that relates to the period
while the taxpayer was a Colorado resident is considered and included in the
denominator of the fraction used to calculate the credit limitation. The
$48,000 of income included in the denominator consists of the $42,000 of wage
income earned while working as a Colorado resident and the $6,000 of rental
income realized while the taxpayer was a Colorado resident.
(B)
Total Modified Adjusted Gross
Income Considered from State A Sources. Pursuant to paragraph
(4)(b)(ii) of this rule, the numerator used to calculate the credit limitation
is the $6,000 of rental income realized from State A sources that was included
in the total modified adjusted gross income considered pursuant to paragraphs
(4)(b)(i) and (4)(c)(vi)(A) of this rule.
(C)
Credit Limitation. The
credit the taxpayer can claim for tax paid to State A is limited to $198.
Pursuant to paragraphs (3)(b) and (4)(b) of this rule, the taxpayer's $1,584
gross Colorado tax is multiplied by a fraction, the numerator of which is
taxpayer's $6,000 of State A rental income realized while the taxpayer was a
Colorado resident and the denominator is the $48,000 of total modified adjusted
gross income considered pursuant to paragraphs (4)(b)(i) and (4)(c)(vi)(A) of
this rule.
(5)
Redeterminations. In
accordance with section
39-22-108(3),
C.R.S., if the tax ultimately paid to the other state differs from the amount
of tax for which a taxpayer claimed credit or if any part of the tax paid is
refunded, the taxpayer must notify the Department by filing an amended return
to correct the amount of the credit claimed. Additionally, a taxpayer must file
an amended return to make any necessary corrections to the modified federal
adjusted gross income from sources in other states reported on the taxpayer's
return in calculating the allowable amount of the credit.
(6)
Documentation. Any taxpayer
claiming a credit under section
39-22-108, C.R.S., and this rule
must submit to the Department with their Colorado return the documentation
required by this rule. Any taxpayer claiming a credit must also provide on
request any additional documentation the Department determines is necessary to
verify the credit claimed by the taxpayer.
(a)
A taxpayer claiming a credit for taxes determined and reported on a return the
taxpayer filed with another state must submit with their Colorado return a copy
of the return filed with the other state or so much of the return as is
relevant to the determination of the credit.
(b) If another state imposes income tax on a
pass-through entity (a partnership or S corporation), or a pass-through entity
files a composite return with a state on behalf of its members (its partners or
shareholders), any Colorado resident member claiming credit on their Colorado
return for their distributive or pro rata share of the tax must submit with
their Colorado return a copy of the statement provided by the pass-through
entity reporting the member's distributive or pro rata share of the tax and the
income derived from sources in that state.
Notes
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