One of the most significant provisions of TABOR is the requirement that any revenue collected in excess of the state's spending limit must be refunded to taxpayers.
Colorado has been refunding excess revenue to taxpayers since TABOR was enacted in 1992. However, there has been some confusion about whether these refunds are taxable by the Internal Revenue Service (IRS).
Fortunately for Colorado taxpayers, the IRS has clarified that TABOR refunds are not taxable. In a statement issued in 2015, the IRS confirmed that TABOR refunds are treated as reductions in state income tax liability rather than income themselves. This means that TABOR refunds are not subject to federal income tax.
The IRS's position is consistent with the way that other state tax refunds are treated for federal income tax purposes. If a taxpayer receives a refund of state income tax, that refund is generally not taxable if the taxpayer did not itemize deductions in the prior year. However, if the taxpayer did itemize deductions in the prior year, the state tax refund may be partially or fully taxable.
It's important to note that the IRS's position only applies to TABOR refunds in Colorado. Other states may have different rules for how tax refunds are treated for federal income tax purposes.
In conclusion, Colorado taxpayers can rest easy knowing that their TABOR refunds are not subject to federal income tax. This is good news for anyone who has received a TABOR refund in the past or may be eligible for one in the future. As always, it's important to consult a tax professional if you have any questions or concerns about your taxes.
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