As part of our thorough review we noticed that a different accounting office had added back in full the amount of state and local income tax paid by a taxpayer. Here’s what we gathered based on the tax law.
Colorado State Income Tax return 104 starts with the federal income tax from form 1040. Pursuant to CRS §39-22-104, certain items are added; that is, taxpayer will pay Colorado State tax on those items even though taxpayer did not pay federal income tax on those items.
One such item is State Income Tax. State and local income tax is deductible pursuant to IRC §164(a)(3) on a 1040. It makes sense for Colorado to essentially disallow a deduction for the tax the income of which it is taxing.
Enter local tax, such as the Denver Head Tax. I have good news for you: the Denver Head Tax is deductible on the 1040 and Colorado 104. It is not added in pursuant to CRS §39-22-104. The add-in applies only to state income taxes, not local taxes.