Colorado not Conforming to Tax Free Unemployment Benefit
The Colorado Department of Revenue has announced it will NOT follow the federal statutory changes provided by The American Rescue Plan Act in regards to the taxability of unemployment compensation.
According to the Colorado Department of Revenue press release dated March 12,2021, "Colorado provides guidance on American Rescue Plan related to taxable UI benefits." Coloradans who received unemployment benefits in 2020 and have already filed their federal tax return are strongly encouraged to consider refiling their federal return to ensure their unemployment benefits are exempt from federal income tax.
Colorado's income tax statutes do not incorporate retroactive federal statutory changes that are enacted after the last day of a taxable year. As a result, the American Rescue Plan Act will not impact 2020 state income tax returns, including the taxation of unemployment compensation. The Governor and other state leaders recently announced the Colorado Recover Plan, which was designed to support individuals and employers who pay unemployment premiums. The department will continue reviewing other tax provisions in the American Rescue Plan Act to find ways to support a strong economic recovery for Colorado, and provide further instructions on applicable provisions shortly.
What does this mean to Coloradans? If you received unemployment compensation and have already filed a state tax return for 2020 & included all unemployment compensation in the amount of taxable income reported, then no additional action is needed. If you amended your federal return, then make sure NOT to amend your filed Colorado return to claim a reduction of income related to this change. If you are still preparing to file your 2020 state tax return, then you are required to add back the amount of unemployment compensation excluded from the federal taxable income to line 6 (other additions) of your Colorado Individual Income Tax Return, along with any other addbacks required by law, noting "Unemployment Compensation" in the explanation field.
Click here to read the full press release.
Meghan Tanis & Daniel Carr, "Colorado provides guidance on American Rescue Plan related to taxable UI benefits", March 12, 2021, https://docs.google.com/document/d/1ERc7aRKl0Jewl5fDstljiyehpcp46EMbDe0kOCxtSRk/edit