Since Spring, the Colorado legislature has been busy debating and adopting new laws designed to provide additional tax benefits and incentives to state taxpayers for eligible activities. Not only did this include the introduction of a new state tax credit, but there were also increases made to available amounts under the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC). In addition, there is also a new requirement for employers to send written notification about employee credit eligibility. To help clients, prospects, and others, Hanson & Co has provided a summary of the key details below.
Employer Assistance for Home Purchase Tax Credit
Outlined in Colorado House Bill 1189, there will soon be a new state tax credit available to Colorado employers that contribute to an employee’s eligible expenses in connection with a qualifying home purchase. Starting in 2024, an employer that opens a savings account for employees to help with the costs of purchasing a primary residence may be eligible for a tax credit. Eligible expenses include the down payment, appraisal and mortgage origination fees, inspection costs, and related closing costs. Employers can receive a credit of 5% of total contributions. The maximum amount is limited to $5,000 per employee per year and $500,000 per business per year.
Employees can authorize an employer to withhold a specified amount of earnings as an employee contribution to the savings account. In the event employment is terminated, any unused amount contributed by the employer is forfeited and the employee is entitled to the original contribution amount plus interest. Concurrently, the amount of the credit issued is subject to recapture.
It is important to note the credit is not refundable, but the good news is that it can be carried forward for up to five years. However, it must be claimed in the earliest tax year where it can be applied. To claim the credit, an employer must keep detailed records which show the number of employees to whom contributions were made, the amount contributed to each employee, the number of employees used, and the total amount of employer contributions. It is essential to keep detailed records because the Department of Revenue can request them at any time.
Earned Income & Child Tax Credits
Outlined in Colorado House Bill 23-1112, there will be an increase in the amount which can be claimed for the state’s Earned Income Tax Credit (EITC) and a restructuring of the Child Tax Credit (CTC). Starting in 2024, the legislation increases the EITC a resident can claim on the state income tax return to 40% of the federal credit claimed. The increased limits are set to phase out December 31, 2034.
Concurrently, there is also an increase in the amount which can be claimed for the CTC. The percentage increase depends on the taxpayer’s income level but ranges between 20%, 10% or 5%. This means a taxpayer filing a single return can receive a $1,200 credit if adjusted gross income (AGI) is $25,000 or less, $600 credit if AGI is less than $50,000, and a $200 credit if AGI is less than $75,000. Married filing jointly taxpayers can receive a credit of $1,200 if AGI is less than $35,000, $600 credit if AGI is less than $60,000, and a $200 credit if AGI is less than $85,000.
There are also expanded notification requirements that Colorado employers will soon need to follow. Under current regulations, Denver companies must provide employees with an annual statement showing total compensation paid and withholdings for the prior year. However, thanks to House Bill 23-1006, there will soon be a new requirement to provide written notice of the federal and state EITC and CTC at least one time annually. The notice can be sent using email or text message and must be in English and any other language the employers uses to communicate with employees.
The recently enacted changes provide additional tax saving opportunities for participating employers. Unfortunately, there will also be new notification requirements enacted as well. If you have questions about the information outlined above or need assistance with a tax issue, Hanson & Co can help. For additional information call 303-388-1010 or click here to contact us. We look forward to speaking with you soon.