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For detailed information, please see FYI Income 21: Military Service Members
Beginning on or after January 1, 2016, an active duty service member whose Home of Record is Colorado and whose state of legal residency is any state other than Colorado may reacquire legal residency in Colorado if at least one of the following five criteria are met (these same five criteria apply when acquiring legal residency in another state):
Form DD 2058 – State of Legal Residence Certificate – another tool that may be used to show intent to change legal residency. Service members complete this form to certify their state of legal residence to their employer for the purpose of withholding state income taxes from military pay.
How reacquiring Colorado residency affects Colorado Income Tax filing
For the tax year that begins on January 1, 2016 and for subsequent tax years, an active duty service member who has reacquired residency in Colorado may:
Active duty pay earned in a combat zone that qualifies for the federal tax exemption is not subject to Colorado income tax. However, to the extent income is included in federal taxable income, Colorado tax will also be due on the income. Colorado law allows military and support personnel stationed in a combat zone, as declared by the President, to postpone filing and paying state income taxes until 180 days after their assignment in the combat zone ends. Interest and penalty are deferred during this period. Because most Colorado taxpayers receive a refund, affected taxpayers may want to plan ahead to authorize someone else to file their income tax return for them using a Power of Attorney Form (DR 0145). If the return is filed under this 180 day extension, write the name of the applicable combat zone across the top of the Colorado Form 104.
A service member who is a full-year Colorado resident who spends at least 305 days of the tax year outside of the 50-state boundary of the United States while stationed outside of the United States for active military duty may file as a nonresident on the Colorado income tax return. The service member’s spouse may also file as a nonresident if the spouse accompanies the service member outside of the country for at least 305 days of the tax year while they are stationed there on active military duty.
A nonresident service member is not required to report his/her military income to Colorado. However, if the service member earned nonmilitary Colorado income, this income must be reported to Colorado for income tax purposes. The service member must pay Colorado tax on the following: nonmilitary Colorado salaries, nonmilitary Colorado wages, nonmilitary Colorado tips, nonmilitary Colorado commissions, income from a Colorado business, income from rents, royalties and/or gains from the sale of tangible personal property or real property located in Colorado.
The Colorado income tax filing status (joint or separate) must match the status used for federal income tax filing purposes. For example, if a taxpayer and spouse filed a joint federal return, they must file a joint Colorado return. If a taxpayer and spouse filed separate federal returns, they must file separate Colorado returns.
The rules for the taxability of military retirement benefits are the same as the rules for any retirement pension and annuity income. Persons who were 55 to 64 years of age as of December 31 may exclude up to $20,000 of their military retirement benefits received during the calendar year. Persons who were 65 years of age or older as of December 31, may exclude up to $24,000 of their military retirement benefits received during the calendar year.
In order for a spouse or parent to file and sign an income tax return for a taxpayer who is out of the country, that taxpayer must have authorized someone else to file their return for them through a Power of Attorney, DR 0145. The military power of attorney form cannot be accepted for income tax purposes.