“Death Tax” in Colorado: What You Need to Know
The term “death tax” can be misleading. It’s often used to describe estate and inheritance taxes, but it’s essential to understand the difference.
The good news for Colorado residents? Colorado does not have a state-level estate or inheritance tax. This is a major advantage for those planning their estates.
However, that doesn’t mean you’re entirely off the hook. It’s crucial to understand the implications of the federal estate tax. Even though Colorado doesn’t impose its own tax, the federal government might.
Keep in mind that significant changes to the federal estate tax exemption are scheduled for 2026. These changes will impact estate planning strategies for many people, so it’s wise to consult with a financial advisor or estate planning attorney.
Estate Tax vs. Inheritance Tax: What’s the Difference?
People often use the terms “estate tax” and “inheritance tax” interchangeably, but they’re actually two different things. Here’s a quick guide to help you keep them straight.
What is an Estate Tax?
An estate tax is a tax on the total value of everything a person owns when they die — their real estate, stocks, bonds, art, jewelry, and other assets — before those assets are passed on to the people who inherit them.
The estate tax is applied to the entire estate, not to the individual inheritances.
Estate taxes are calculated based on the fair market value of the assets at the time of death.
What is an Inheritance Tax?
An inheritance tax, on the other hand, is paid by the people who inherit assets from an estate. It’s a tax on the individual gift or inheritance, not on the entire estate.
Inheritance taxes are calculated based on the value of the assets each beneficiary receives.
Key Differences
To sum it up:
- The estate tax is paid by the estate; the inheritance tax is paid by the person who inherits the assets.
- The estate tax is levied on the entire estate; the inheritance tax is levied on individual inheritances.
Estate and Inheritance Taxes in Colorado
Good news for Coloradans: Colorado does not have an estate tax! This is great, because it means that estates in Colorado aren’t subject to the extra tax burden that some other states impose.
And the good news doesn’t stop there. Colorado also does not have an inheritance tax. This makes estate planning much simpler, at least from a state tax perspective.
So, what does this lack of state-level “death taxes” actually mean?
- It means a reduced tax burden on estates and the people who inherit from them.
- It also means that estate planning in Colorado focuses more on federal estate tax rules, since there aren’t any state-level taxes to worry about.
Federal Estate Tax: What Colorado Residents Need to Know
Even though Colorado doesn’t have a state-level estate tax, Coloradans still need to understand federal estate tax laws. Here’s what you should know:
Federal Estate Tax Exemption
As of 2025, the federal estate tax exemption is \$13.99 million for individuals and \$27.98 million for married couples. This means that a substantial portion of most estates is shielded from federal estate taxes.
You can also give up to \$19,000 per recipient per year without incurring any gift tax. This annual gift tax exclusion lets you reduce the size of your estate during your lifetime.
Federal Estate Tax Rate
The federal estate tax rate is 40% on the amount exceeding the exemption. So, if your estate is worth more than the exemption amount, that excess will be taxed at a rate of 40%.
For example, if you are not married and your estate is valued at \$15.93 million, the amount over the exemption would be taxed. Here’s how it breaks down:
- Estate value: \$15.93 million
- Exemption: \$13.99 million
- Taxable amount: \$1.94 million
- Tax owed (at 40%): \$776,000
But the amount owed isn’t quite that simple. There’s also a base tax payment of \$721,800. So, in this example, the total federal estate tax owed would be \$721,800 + \$776,000 = \$1,497,800.
Upcoming Changes in 2026
The federal estate tax exemption is scheduled to revert to approximately \$7 million (adjusted for inflation) per individual on January 1, 2026. This change will significantly impact estate planning for many individuals and families, as more estates will be subject to federal estate tax.
Strategies for Colorado Residents to Minimize Federal Estate Tax
While Colorado doesn’t have its own estate tax, Coloradans are still subject to the federal estate tax. Fortunately, there are legal strategies you can use to reduce your estate tax burden. Here are a few:
Gifting Strategies
- Annual gift tax exclusion: The IRS lets you give a certain amount of money to as many people as you want each year without having to pay a gift tax. For 2024, that amount is \$18,000 per recipient, but it may change in future years.
- Irrevocable trusts: You can make larger gifts to an irrevocable trust, which can shift future appreciation out of your estate.
Trusts
- Grantor Retained Annuity Trusts (GRATs): With a GRAT, you can transfer assets while still receiving an annuity. Combine a GRAT with direct indexing for even better tax efficiency.
- Intentionally Defective Grantor Trusts (IDGTs): These trusts can freeze the value of assets for estate tax purposes.
- Spousal Lifetime Access Trusts (SLATs): SLATs allow one spouse to benefit from the trust while taking assets out of the taxable estate.
- Irrevocable Life Insurance Trusts (ILITs): By holding life insurance policies in an ILIT, you can keep the proceeds from being included in your taxable estate.
- Charitable Lead Annuity Trusts (CLATs): A CLAT provides income to a charity for a period of time, after which the remainder goes to your heirs.
Other Strategies
- Family Limited Partnerships (FLPs): FLPs can be used to transfer business interests while you maintain control.
- Charitable Contributions: Donations to qualified charities reduces the size of your taxable estate.
- Life Insurance: Life insurance can provide the cash your heirs need to pay estate taxes or replace assets you’ve passed on to them.
Capital Gains Taxes and Inherited Property in Colorado
Even though Colorado doesn’t have an estate tax, inheriting property can still have tax implications, particularly when it comes to capital gains taxes.
Stepped-Up Basis
Here’s how it works: When you inherit property, its tax basis is “stepped up” to its fair market value on the date of the person’s death. This can significantly lower the capital gains taxes you might owe if you decide to sell the property.
For example, say your parents bought a house for $400,000, and it’s worth $600,000 when you inherit it. The stepped-up basis becomes $600,000. If you sell the house for $650,000, you’d only pay capital gains taxes on the $50,000 difference.
Capital Gains Tax Rates
In Colorado, the capital gains tax rate is 4.4%. The federal capital gains tax rates range from 0% to 20%, depending on your income bracket. These are the long-term rates, which apply to assets held for longer than a year. If you sell an asset you’ve held for less than a year, the short-term capital gains rates, which range from 10% to 37%, will apply.
Also, keep in mind that a 3.8% Net Investment Income Tax (NIIT) might apply if you have a higher income.
Wrapping Up
Good news for Coloradans: The Centennial State doesn’t have its own estate or inheritance tax. But that doesn’t mean you can ignore estate taxes altogether.
The federal estate tax could still apply, and with changes on the horizon in 2026, it’s more important than ever to understand how it works and plan accordingly. Given the complexities involved, it’s wise to consult with an experienced estate planning attorney and a qualified financial advisor.
These professionals can help you develop personalized strategies to minimize your estate tax liability and achieve your broader estate planning goals. Taking a proactive approach to estate planning can protect your assets and ensure your wishes are honored, providing peace of mind for you and your loved ones.