Taxes imposed on the transfer of assets at death are commonly called “death taxes.” There are three types of death taxes: (1) inheritance taxes, which are levied on the individual who inherits assets from someone who is deceased; (2) estate taxes, which are levied on the estate of a deceased person, prior to inheritance by another individual; and gift taxes, which are imposed on the transfer of wealth from a living individual. A state inheritance tax was enacted in Colorado in 1927. In 1980, the state legislature replaced the inheritance tax1 with an estate tax.
Until 2005, a tax credit was allowed for federal estate taxes, called the “state death tax credit.”2 The Colorado estate tax is based on this credit. Federal legislative changes reduced the state death tax credit between 2002 and 2004 and ultimately eliminated it, effectively eliminating the Colorado estate tax for individuals who die after December 31, 2004.3 If federal law is changed to reinstate the state death tax credit, a Colorado estate tax may be collected on estates in future years. Notably, the elimination of the state death tax credit does not reduce the total amount of estate taxes paid. Instead, it shifts the distribution of estate tax revenue from Colorado to the federal government.
Under current law, no Colorado estate tax filing is required for estates of individuals who die after December 31, 2004. If the date of death occurs prior to December 31, 2004, Form DR 1210 must be filed. Additional information on filing can be found on the Colorado Department of Revenue website. Estate tax revenue is subject to the spending and revenue limitations of TABOR.
The Colorado estate tax is based on the state death tax credit, which until 2005 was allowable on federal estate tax returns. The state death tax credit is calculated as a percentage of the value of the federal adjusted taxable estate, which is calculated as the fair market value of all assets gifted to another individual less certain deductions. The Colorado estate tax is calculated as the share of the estate that includes Colorado property multiplied by the state death tax credit.
No state exemptions are allowed. However, the federal “unified credit,” reduces the federal estate tax liability and therefore can affect the state tax liability. The unified credit applies to both federal gift tax and estate taxes, which are integrated into one “unified” tax system. The maximum unified credit allows a person who died in 2015 to gift up to $5.43 million during his or her lifetime without paying gift or estate taxes. The credit amount is adjusted by inflation each year.
Revenue from the estate tax is credited to the General Fund through the Old Age Pension Fund for spending on general operations.4 In FY 2013-14, $0.4 million in estate taxes were collected. This amount reflects collections from estates of individuals who died prior to 2005.
Most simple estates, such as cash or a small amount of easily valued assets, do not require the filing of an estate tax return. For 2015, a filing is required for estates with combined gross assets and prior taxable gifts exceeding $5.43 million. A federal estate tax return can be filed using Form 706.
The phase out of the state estate tax credit eliminated estate taxes for many states. Currently, about a quarter of states collect an estate tax