Key Takeaways
• Colorado’s 2025 flat income tax rate is 4.40%, effective January 1, 2025.
• Senate Bill 24-228 allows temporary rate reductions after October 1, 2025, based on extra state revenue.
• Special deductions apply for retirees; local occupational privilege taxes exist in some Colorado cities.
Colorado’s income tax system is seeing important updates for 2025, and these changes will affect many people living and working in the state, including immigrants, new residents, and employers. Understanding the Colorado state income tax rate, how it is set, and what might change later in the year is important for anyone who needs to file taxes or manage payroll in Colorado. Here’s a clear summary of what’s new, who is affected, what actions are needed, and what these changes mean for people with pending tax filings or future plans in the state.
Summary of What Changed
As of July 9, 2025, the Colorado state income tax rate is set at a flat rate of 4.40%. This means that all taxable income, no matter how much you earn, is taxed at the same percentage. The Colorado Department of Revenue has confirmed that this flat rate will be used for most of the 2025 tax year, especially for payroll withholding and estimated tax payments. This is a change from the 2024 tax year, when the rate was slightly lower at 4.25%.
However, there is a new rule in place that could lower the rate later in the year. Thanks to Senate Bill 24-228, Colorado now reviews its state revenue each year. If the state collects more money than expected, the law allows for a temporary reduction in the flat tax rate. This review happens after October 1, 2025. If the state’s revenue is high enough, the tax rate could drop by as much as 0.15% for the rest of the year.
Who Is Affected by These Changes
- All Colorado Residents: Anyone who lives in Colorado and earns taxable income will pay the flat 4.40% rate for most of 2025.
- Nonresidents with Colorado Income: If you live outside Colorado but earn income from work or business in the state, you are also subject to the flat rate.
- Employers and Payroll Professionals: Companies must withhold state income tax from employee paychecks at the 4.40% rate until at least October 1, 2025.
- Retirees and Seniors: Retirement income, including pensions and annuities, is taxed at the same flat rate, but there are special deductions for people aged 55 and older.
- People Working in Certain Cities: Some cities in Colorado, like Denver and Aurora, have their own local taxes in addition to the state income tax.
Effective Dates and Timeline
- January 1, 2025: The 4.40% flat rate takes effect for all income earned in 2025.
- October 1, 2025: The Colorado Department of Revenue will review state revenue. If the state has collected more than expected, a temporary rate reduction could apply for the rest of the year.
- November 2024: Updated withholding forms will be released to reflect any changes for the 2025 tax year.
- April 2026: Taxpayers will file their 2025 tax returns, reflecting the final rate(s) that applied during the year.
Required Actions for Taxpayers and Employers
- For Employees and Individuals:
- Check Your Withholding: Make sure your employer is withholding state income tax at the 4.40% rate.
- Watch for Updates: After October 1, 2025, check for announcements from the Colorado Department of Revenue about any rate changes.
- Plan for Deductions: If you are 55 or older and receive retirement income, make sure to claim the correct deductions on your tax return.
- File on Time: File your 2025 tax return in 2026 using the final rate(s) set by the state.
- For Employers:
- Withhold at 4.40%: Continue withholding state income tax at the 4.40% flat rate until you receive official notice of any changes.
- Update Payroll Systems: Be ready to adjust withholding rates if the state announces a reduction after October 1, 2025.
- Use Updated Forms: Switch to the new withholding forms when they are released in November 2024.
- Communicate with Employees: Let your staff know about any changes to withholding rates or forms.
Implications for Pending Applications and Tax Planning
If you have already filed your 2025 tax return or set up your payroll for the year, you do not need to make any immediate changes. However, if the state announces a lower rate after October 1, 2025, you may need to adjust your withholding or estimated payments for the rest of the year. This could mean a small refund or a lower tax bill when you file your return in 2026.
For people who are planning to move to Colorado, start a new job, or retire in the state, it’s important to understand that the flat rate applies to all income, but there are special rules for retirement income and local taxes in some cities.
Details on the Flat Tax Rate and How It Works
Colorado’s tax system is different from many other states because it uses a flat tax instead of a system with tax brackets. In a flat tax system, everyone pays the same percentage of their income, no matter how much they earn. For 2025, this means:
- All taxable income is taxed at 4.40%.
- There are no tax brackets—the rate does not go up or down based on your income level.
- This system makes it easier to figure out how much tax you owe, but it also means that lower-income earners do not get a lower rate.
How the Rate Reduction Mechanism Works
Senate Bill 24-228 created a new rule that allows the state to lower the flat tax rate if Colorado collects more revenue than expected. Here’s how it works:
- After October 1, 2025, the state checks if it has collected more than a set amount of money (called the “baseline”).
- If there is extra revenue, the tax rate can be reduced for the rest of the year.
- The size of the reduction depends on how much extra money the state has:
- $300 million to $500 million extra: Rate drops by 0.04%
- $500 million to $600 million extra: Rate drops by 0.07%
- $600 million to $700 million extra: Rate drops by 0.09%
- $700 million to $800 million extra: Rate drops by 0.11%
- $800 million to $1 billion extra: Rate drops by 0.12%
- $1 billion to $1.5 billion extra: Rate drops by 0.13%
- More than $1.5 billion extra: Rate drops by 0.15%
- These reductions are temporary and only apply for the rest of the year after the review.
- The process repeats every year through 2034, so the rate could change again in future years.
Local Income Taxes in Colorado
While the state income tax is flat, some cities in Colorado have their own local taxes. These are called occupational privilege taxes and are separate from the state tax. For example:
- Denver, Aurora, Glendale, Greenwood Village, and Sheridan all have local taxes for people who work in those cities.
- These local taxes are usually small but can add to your total tax bill.
- If you work in one of these cities, check with your employer or the city government to see if you need to pay this extra tax.
Retirement Income and Deductions
Colorado taxes retirement income, such as pensions and annuities, at the same flat rate as other income. However, there are special deductions for seniors:
- People aged 65 and older: Can deduct up to $24,000 of pension and annuity income from their taxable income.
- People aged 55 to 64: Can deduct up to $20,000.
- These deductions can help lower your tax bill if you are retired or planning to retire soon.
Withholding and Tax Forms
Employers are required to withhold state income tax from employee paychecks at the 4.40% rate for most of 2025. The Colorado Department of Revenue will release updated withholding forms in November 2024. If the rate changes after October 1, 2025, employers will need to update their payroll systems and use the new forms.
If you are self-employed or make estimated tax payments, use the 4.40% rate for your calculations until you hear otherwise from the state.
Payment Plans and Offers in Compromise
If you cannot pay your full tax bill, Colorado offers payment plans and an Offer in Compromise program. This allows you to settle your tax debt for less than the full amount owed if you qualify. For more information, visit the Colorado Department of Revenue’s Individual Income Tax Guide.
Background and Historical Development
Colorado has used a flat tax system for many years. Before 2024, the flat rate was 4.4%. In 2024, the rate was temporarily lowered to 4.25% thanks to Senate Bill 24-228. This same bill created the new rule for temporary rate reductions based on extra state revenue, which will be in place through 2034.
The flat tax system makes Colorado different from most other states, which use tax brackets that increase the rate for higher incomes. Supporters say the flat tax is simpler and easier to manage, while critics say it does not provide enough relief for lower-income earners.
Expert and Stakeholder Perspectives
Tax experts say that Colorado’s flat tax system makes filing taxes easier for most people. However, because everyone pays the same rate, it can be harder for lower-income families, who do not get a lower rate like they would in a bracketed system.
State officials say the new revenue-based reduction rule is a way to give taxpayers relief when the state is doing well financially, while still making sure there is enough money for public services.
Employers and payroll professionals need to pay close attention to the rate, especially after the October review, to make sure they are withholding the correct amount from employee paychecks.
Future Outlook and What to Watch For
The next big date to watch is October 1, 2025. After this date, the Colorado Department of Revenue will announce whether the flat rate will be reduced for the rest of the year. If the state’s revenue is high enough, you could see a small drop in the amount of tax withheld from your paycheck or owed on your tax return.
This review process will happen every year through 2034, so it’s important to stay informed about possible changes in future years. Taxpayers should check the Colorado Department of Revenue’s website for updates and use the latest forms and rates when filing returns.
Practical Guidance and Next Steps
- Employees: Make sure your paychecks are being taxed at the correct rate. If you are unsure, ask your employer or check your pay stub.
- Employers: Stay ready to update your payroll systems and use new forms if the rate changes after October 1, 2025.
- Retirees: Take advantage of the deductions for pension and annuity income if you qualify.
- New Residents and Immigrants: Learn about the flat tax system and check if you are subject to any local taxes in your city.
- All Taxpayers: Mark your calendar for October 1, 2025, and watch for official announcements about possible rate reductions.
As reported by VisaVerge.com, these changes reflect Colorado’s ongoing efforts to balance simple tax rules with the flexibility to adjust rates based on the state’s financial health. The flat rate system, combined with the new revenue-based reduction rule, means that taxpayers need to stay alert for updates each year.
For the most up-to-date information, forms, and guidance, visit the Colorado Department of Revenue’s official website.
By staying informed and taking the right steps, you can make sure you are paying the correct amount of tax and taking advantage of any deductions or rate reductions that apply to you.
Learn Today
Flat Tax → A tax system where all taxable income is taxed at the same fixed percentage rate.
Senate Bill 24-228 → Colorado law allowing temporary tax rate reductions based on yearly excess state revenue.
Occupational Privilege Tax → A local tax charged by some Colorado cities on workers within their jurisdiction.
Withholding → The money an employer deducts from an employee’s paycheck for state income taxes.
Offer in Compromise → A program allowing taxpayers to settle tax debts for less than the full amount owed.
This Article in a Nutshell
Colorado sets a flat 4.40% income tax rate for 2025 with possible reductions after October 1. Retirees benefit from deductions, while employers must update payroll forms by November 2024. Local taxes apply in some cities, highlighting the importance of staying informed for tax deadlines and changes.
— By VisaVerge.com
