Background:
CO recently passed legislation to limit itemized deductions for some taxpayers. For tax year 2022, this applies to taxpayers with Federal AGI over $400k, and the itemized deduction limit is $30k for single filers and $60k for joint filers. For tax year 2023, the threshold will be lowered to $300k, and the limits lowered to $12k for single and $16k for joint. The law is in C.R.S. 39-22-104(3)(p) for tax year 2022 and (p.5) for tax year 2023.
Existing CO legislation already disallowed itemized deduction of state income tax paid to any state, for CO income tax purposes.
Both of the above are implemented via addbacks to Federal taxable income on CO DR 0104 lines 2-7 (2022). To the extent state income tax raises total itemized deductions above the standard deduction, it is added back to CO taxable income via line 2. Similarly, to the extent total federal itemized deductions exceeds the new limit, that excess is added back to CO taxable income via line 4.
Issue:
You probably already noticed that in some cases, state income tax would be added back twice if one followed the letter of the state laws, because state income tax is already counted in itemized deductions. This is effectively double taxation! Currently, TurboTax Premier online does just that.
For example, suppose a single filer with $450k AGI in 2022 itemizes and deducts $10k of state income tax and $30k of other deductions, for total federal itemized deductions of $40k. Their federal taxable income would thus be $410k.
For CO, line 2 would add back $10k for state tax, and line 4 would add back $10k again for the total excess deductions over $30k. Thus CO taxable income would be $430k. Effectively, the taxpayer would get only $20k of non-state-income-tax deductions from their $450k AGI for CO, rather than the $30k they could reasonably expect based on the spirit of the new law.
Potential solution:
The CO Department of Revenue has already recognized this issue with the law, and published a draft rule a couple months ago, stating that the itemized-deductions addback should be reduced by the amount already added back on line 2. This rule has not been finalized yet but seems very reasonable and resolves the double-taxation issue:
https://tinyurl.com/5n86rfu6
(I tried to post a direct link to the page on tax.colorado.gov, but the forum code mistakenly redacts a portion of the url. You can also go to https://tax.colorado.gov/category/news-article and search for "Request for Public Input – Individual Income Tax Itemized and Federal Deductions Addback Rules")
The relevant document there for tax year 2022 is Rule 39-22-104(3)(p), and the relevant text of the draft rule is:
(3) Coordination with Other Addbacks.
(a) An addition for itemized deductions required pursuant to section 39-22-104(3)(p), C.R.S., is reduced by:
(i) Any addback required pursuant to section 39-22-104(3)(d)(I), C.R.S., for state income taxes deducted
However, TurboTax Premier online doesn't use that draft rule yet, so it effectively adds back the state income tax twice, both on DR 0104 line 2 and line 4.
What's the best workaround in TurboTax, to implement the draft rule reducing line 4 by the amount already added back on line 2?
