Prop FF: Colorado Voters Approve a Tax Increase on the Wealthy - How Colorado Taxpayers Can Respond to Limitations on State Deductions

 

On November 8, 2022 Colorado voters approved Proposition FF creating a program to provide access to free meals to all public school students in Colorado.1 Funding for the program comes from an increase in state taxes on households with more than $300,000 in Federal adjusted gross income by limiting state income tax deductions. The new statute limits deductions to $12,000 for single tax filers and $16,000 for joint filers. The limit on deductions serves as a tax increase for those with income above this level. The tax increase would begin in 2023. The bill is expected to raise $100 million in new revenues each year to support the program.2 Colorado taxpayers have a number of options available to them to limit the impact of this higher tax.

The higher taxes will begin in 2023. To limit exposure taxpayers could accelerate deductions and income into the 2022 tax year. Taxpayers could accelerate their itemized deductions with these options:3

  • Making additional or multi-year charitable deductions
  • IRA and retirement plan contributions
  • Health Savings Account (HSA) contributions

Making multi-year charitable deductions using a donor-advised fund is one of the easiest ways to increase deductions in a given year. A donor-advised fund is a registered 501(c)3 charity that accepts donations from grantors in a given year and then holds the funds for distribution in the future.4 The grantor receives the deduction in the year in which the donation was made but can spread out distributions in the future. More information donor-advised funds can be found here:

Business owners could reduce their taxable income in 2022 by taking advantage of the 100% bonus depreciation options from the Tax Cut & Jobs act.5 This allows business owners to purchase qualified new and used property that is acquired and put into service before January 1, 2023. Your business may be able to write off the entire cost of some or all of your asset additions on this year’s return. Contact your tax advisor to discuss what property is eligible but examples include some building improvements, computers, software, machinery, equipment, and office furniture.

Alternatively, taxpayers could accelerate income into 2022 to reduce the amount of taxable income subject to the new Colorado tax in 2023. Taxpayers could accelerate income by:6

  • Recognizing capital gains
  • Exercising stock options or realizing deferred compensation
  • Converting an IRA to a Roth IRA

After the tax takes effect in 2023 taxpayers could limit its impact by reducing their Federal adjusted gross income. They could do this by taking advantage of the tax deductions listed above.

Business owners have multiple options to reduce their taxable income in 2023 and beyond. They can reduce their taxable income by setting up a solo 401(k) or company retirement plan. The contribution limit for 2022 is $20,500 for those under 50 and $26,500 for those 50 and over.7 Owners can also reduce their taxable income by setting up a fringe benefit plan for employees. These plans allow a business to offer benefits to employees that help reduce taxable income.8 Businesses that own the real estate in which they operate could explore a cost segregation study to help reduce their taxable income. Cost Segregation studies allow businesses to carefully examine their properties and shorten their depreciation time for tax purposes. By shortening the depreciation time for qualified assets business owners incur a higher annual depreciation expense and lower their tax bill.9

Colorado’s new tax on wealthy taxpayers can be addressed through careful planning and timing of tax strategies. Contact your tax advisor to discuss your options. Summit Hill Wealth Management is available to discuss your financial and tax planning options. Please contact us at info@summithillwealth.com.

All written content is for information purposes only. Opinions expressed herein are solely those of Summit Hill Wealth Management, LLC and our editorial staff. Material presented is believed to be from reliable sources; however, we make no representations as to its accuracy or completeness. All information and ideas should be discussed in detail with your individual adviser prior to implementation. Advisory services are offered by Summit Hill Wealth Management, LLC a Registered Investment Advisor in the State of Colorado.

 
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