Federal funds to assist Coloradans in online filing of state, federal tax returns

Federal tax money is returning to Colorado via free online tax filing for state and federal returns, which could help low-income taxpayers obtain more credits.

Taxpayer money from the $500 billion Inflation Reduction Act will pay for Coloradans to electronically file their state and federal returns for tax year 2025 in 2026 through a program called Direct File.

The Colorado Department of Revenue currently offers a free electronic service to file state tax returns. However, the Democratic Gov. Jared Polis and the Department of Revenue contend Direct file will save Coloradans millions in filing fees, hours of time and help taxpayers get information on possible additional tax credits.

“Filing taxes is no fun,” Polis said in a statement. “It is often confusing, time-consuming and expensive, which is why we’re taking steps to make it easier for Coloradans to file.”

The Internal Revenue Service announced in March a full-scale launch of a pilot program of Direct File. A measured launch of Direct File was successful in early 2024 as taxpayers filed returns free of charge directly with the IRS.

The full-scale launch in late March was restricted to 12 states, Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington and Wyoming.

The Economic Security Project, a progressive nonprofit organization with a focus on promoting guaranteed basic income and other personal financial issues, published a report on the benefits of Direct File. The report estimated Direct File would save taxpayers an average of $160 in filing fees and hours of time each year.

“At scale, its potential benefits for American taxpayers are extraordinarily large,” according to the report. “A public option for tax filing, Direct File can make the tax preparation market more equitable, inclusive, and competitive. … By breaking down barriers to filling, Direct File would also deliver up to $12 billion each year in additional tax credits to low-income families currently missing out.”

The Economic Security Project estimates the total annual amount of money saved by the electronic filing system will be $336.5 million to Coloradans. The amount includes $140.2 million in filing fees and $52.6 million saved when estimating the cost of time spent filing.

By using Direct File, the organization estimates Colorado taxpayers could gain approximately $80.6 million to $206.8 in additional federal tax credits each year.

If American Rescue Plan earned income tax credits and child tax credits were renewed by Congress, it would increase benefits low-income taxpayers. The organization estimated Direct File could assist taxpayers with $4.6 to $11.8 billion in credits and qualifying Colorado taxpayers could be eligible for $325.9 to $830.6 million

“This action, which we called for, will save Coloradans time and millions of dollars of filing fees while ensuring hardworking families and individuals receive the additional claims and credits they have earned,” Polis said.