2026 Updates

During the summer of 2025 the Federal Government (One Big Beautiful Bill - OBBB) and the state of Colorado passed tax laws with a number of changes to the individual returns. These changes apply to income earned in 2025 and for many taxpayers, these changes will result in an increased refund. At this time, it’s hard to tell how the new laws will affect each individual return and for some taxpayers the amount of the tax break may be limited.

The 2025 tax laws were passed half way through the year, and now the organizations that issue W-2s and 1099s must make changes in how they report income. Because of this, there may be some extra work needed to claim the new deduction and the internet may be the best solution if the deduction amount isn’t sent to you on a W2 or 1099.

No more paper checks. Beginning this year, the IRS will issue paper checks for refunds only to people without a bank account, everybody else will have to get direct deposit. The same is true for payments, no more paper checks except for a few exceptions. I can enter the bank information when we prepare the return, or you can pay online through the IRS website.

The annual task of collecting income tax documents each year begins in January and ends mostly in March. Until recently, these forms would have been printed and delivered by mail. Now, many taxpayers retrieve their documents through online websites. The government and the companies that issue these documents would prefer that we use the online method but there can be access problems when the sites don’t work as promised or they are hard to understand and with difficult security. But because I have seen more problems with mail delivery lately, I recommend that you try to get online access set up for your tax documents. I wouldn’t be surprised if they end most mail delivery so you may want to be prepared.

I copied much of the information in the federal section from the IRS website in January 2026. The italics are my comments and the estimates I make are general approximations.

Deduction for seniors

• Effective 2025 through 2028, individuals age 65 and older may claim an additional $6,000 deduction.
• This is in addition to the standard deduction for seniors available under existing law.
• Applies per eligible individual (or $12,000 for a married couple if both spouses qualify).
• Phases out for taxpayers with modified adjusted gross income over $75,000 ($150,000 for joint filers)

There is no additional reporting requirement for this deduction.  For a taxpayer with income of $50,000, the senior deduction is probably worth around $1,000.  This deduction applies to all income, not just social security income.

No tax on tips

• Effective 2025 through 2028, employees and self-employed individuals may deduct qualified tips they received in occupations the IRS identified as “customarily and regularly receiving tips” on or before December 31, 2024, and are reported on a Form W-2, Form 1099, another statement furnished to the individual, or on Form 4137 if the individual directly reports the tips.
• “Qualified tips” include voluntary cash or charged tips received from customers, including shared tips.
• Maximum annual deduction is $25,000.
• For self-employed individuals, deduction cannot exceed net income (before this deduction) from the trade or business where tips were earned.
• Phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).

The taxpayer's tip income should be reported on the W2, but this year that is not a requirement for employers.  There are other ways to obtain the information if it does not appear on the W2, including the internet. For a single taxpayer in the $40,000 to $80,000 income range, my estimate for the reduction in tax is between $80 to $120 per $1,000 of tip income.  A single taxpayer with $80,000 income and tip income at the $25,000 maximum will receive a tax benefit of around $4,500.

No tax on overtime

• Effective 2025 through 2028, individuals may deduct the portion of qualified overtime pay that exceeds their regular rate of pay (for example, the “half” portion of “time-and-a-half”).
• Overtime must be reported on Form W-2, Form 1099, another statement furnished to the individual, or directly by the individual.
• Maximum annual deduction is $12,500 ($25,000 for joint filers).
• Phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).

The taxpayer's overtime income should be reported on the W2, but this year that is not a requirement for employers.  There are other ways to obtain the information if it does not appear on the W2, including the internet. For a single taxpayer with $50,000 in income and $1000 in overtime, my estimate for the reduction in tax is $120. 

No tax on car loan interest

• Effective 2025 through 2028, individuals may deduct interest paid on a loan used to purchase a qualified vehicle for personal use that meets other eligibility criteria. Lease payments do not qualify.
• Maximum annual deduction is $10,000.
• Phases out for taxpayers with modified adjusted gross income over $100,000 ($200,000 for joint filers).

Qualified vehicle = New vehicle purchased in 2025 with final assembly in the US.  VIN, Vehicle Identification Number needs to be provided by the taxpayer for entry on the tax form.  This will be used to verify that the vehicle is eligible for the loan interest deduction.  For a single taxpayer with $50,000 of income and $1000 of auto loan interest, my estimate for the reduction in tax is $120. Used vehicles and leased vehicles are not eligible for this credit.

Adoption credit

• Beginning tax years after December 31, 2024, up to $5,000 (indexed for inflation) of the adoption credit may be refundable.
• Any credit amount carried forward from prior years cannot be used to calculate the refundable portion.

A refundable credit is a credit that will generate a refund for the taxpayer even though tax is not due on the return.

Overview of Trump Accounts

• Parents, guardians, or others can establish a Trump Account for an eligible child.
• Trump Accounts cannot be funded before July 4, 2026.
• The federal government will make a one-time $1,000 contribution for each eligible child’s account.
• Authorized contributions from individuals and employers are allowed up to $5,000 per year.
• Employers can contribute up to $2,500 per year toward an employee’s or dependent’s Trump Account without it counting as taxable income for the employee.
• Funds must be invested in certain mutual funds or exchange-traded funds that track a U.S. stock index such as the S&P 500.

You will be able to request an account when you file your 2025 1040 tax return.  Only children born during the period of 2025 to 2028 are eligible for this account.

Expiring clean vehicle credits

The Act accelerates the end of several clean vehicle credits:

• New Clean Vehicle Credit (30D): Not allowed for any vehicle acquired after September 30, 2025
• Used Clean Vehicle Credit (25E): Not allowed for any vehicle acquired after September 30, 2025.
• Qualified Commercial Clean Vehicle Credit (45W): The credit will not be allowed for any vehicle acquired after September 30, 2025.

These credits can be claimed on the 2025 tax return.

Expiring home energy credits

The Act accelerates the end of the following home and residential energy credits:

• Energy Efficient Home Improvement Credit (25C): Not allowed for any property placed in service after December 31, 2025.
• Residential Clean Energy Credit (25D): Not allowed for any expenditures made after December 31, 2025.

These credits can be claimed on the 2025 tax return.

Health Savings Accounts (HSA)

The OBBB expands access to HSAs by making the following changes:

• The OBBB made permanent the ability to receive telehealth and other remote care services before meeting the high-deductible health plan (HDHP) deductible while remaining eligible to contribute to an HSA, effective for plan years beginning on or after Jan. 1, 2025.
• As of Jan. 1, 2026, bronze and catastrophic plans available through an Exchange are considered HSA-compatible, regardless of whether the plans satisfy the general definition of an HDHP. This expands the ability of people enrolled in these plans to contribute to HSAs, which they generally have not been able to do in the past. Notice 2026-05 clarifies that bronze and catastrophic plans do not have to be purchased through an Exchange to qualify for the new relief.
• Beginning Jan. 1, 2026, an otherwise eligible individual enrolled in certain direct primary care (DPC) service arrangements may contribute to an HSA. In addition, they may use their HSA funds tax-free to pay periodic DPC fees.

Health Savings Accounts are available to people with health insurance provided by an employer or purchased through an ACA state health care exchange such as Connect for Health Colorado.

Child Tax Credit

The Child Tax Credit is worth up to $2,200 per qualifying child. If you have little or no federal income tax liability, you may qualify for the Additional Child Tax Credit, up to $1,700 per qualifying child depending on your income. You must have earned income of at least $2,500 to be eligible for the ACTC.

The amount of this credit has been at $2,000 since 2018 except for 2021 when it was temporarily increased to $3,200. The $200 increase should have been larger in my opinion.

Expiring ACA enhanced healthcare subsidies. The change in the ACA subsidies does not have an effect on this year's tax season. There still may be another change to the law, we will have to wait and see.

Age                Under 65             Over 65          Senior Ded

Single              $15,750               $17,750          $23,750

HOH                $23,625               $25,625          $31,625

Married           $31,500               $34,700          $46,700

One spouse over 65                     $33,100          $39,100

Blind persons add single $2,000 and married $1,600

Most of the new and enhanced CO tax credits are for taxpayers of moderate-income levels. There are also credit reductions that may increase the amount of tax owed for some taxpayers.  I will update this page as I receive more information.

Colorado Promise Tuition and Fee Credit

This is a refundable credit available to CO residents that attended a Colorado public college or university. This credit is in addition to the federal education credit.  Family income must be less than $90,000, start semester with less than 66 credits and have a GPA of greater than 2.5 during the current year.  I don't know how the GPA will be reported, but reviewing report cards is not something that interests me as a tax professional.

Qualified Care Worker Credit

Registration Requirement
You must be registered with the Department of Early Childhood’s Colorado Shines Professional
Development Information System (PDIS) to qualify for the credit. Information about the PDIS is
available online at ColoradoShines.com//professionals.
Work Hours Requirement
You must provide qualifying care in Colorado for at least 720 hours during tax year 2025 as:
1. A licensee and operator of an eligible program in Colorado (see below);
2. An employee of an eligible program in Colorado (see below); or
3. An informal family friend or neighbor childcare worker in Colorado (see below).
An eligible program may be either an early childhood education program or a family childcare home.
It must be licensed by the Colorado Department of Early Childhood during 2025. An eligible program
must have at least a level one quality rating pursuant to the Colorado Shines quality rating and
improvement system for the entirety of 2025, or for the part of 2025 for which it was licensed.

Refundable credit available to childcare and direct care workers with a valid professional credential.  Income limits are $75,000 single and $100,000 married.   

Disability Assistance Credit

Individuals with disabilities who have a federal adjusted gross income (AGI) of $20,000 or less for single filers, or $32,000 or less for joint filers, will be eligible for an income tax credit starting from tax years that begin on or after January 1, 2025.

This new tax credit ranges from $400 to $1,200, depending on the individual's income and filing status, and it will be adjusted annually for inflation.

This refundable credit is available to taxpayers with a disability who has expenses in 2025 related to care giving, support or accessibility.

Adjusted Limit for Subtraction of Social Security Benefits

This is a new income-based limitation on the deduction for retirement income in the CO tax return. The current $24,000 deduction is phased out for income above $75,000 single and $95,000 married.

Itemized and Standard Deduction Addback

Taxpayers who have federal adjusted gross income exceeding $300,000 in tax year 2025 may be required to add back itemized or standard deductions over a certain amount in this line, if your itemized or standard deductions on line 12e of IRS Form 1040 exceed $12,000

QBI Deduction Addback

This is a reduction of the QBI addback for small business owners if your income is greater than $500,000, or if you are a partner in a partnership that made a SALT Parity Election or a shareholder in an S corporation that made a SALT Parity Election 

EV Credit Reduction

CO electric vehicle credits have been reduced in 2025 and 2026 and may not be available in 2027.

TABOR refund amounts for Tax Year 2025

 

Adjusted Gross Income	Credit for Single Filers	Credit for Joint Filers
$52,000 or less	$19	$38
$52,001 - $105,000	$25	$50
$105,001 - $168,000	$29	$58
$168,001- $233,000	$35	$70
$233,001- $299,000	$37	$74
$299,001 or more	$59	$118

 

Press Release January 5, 2026

Colorado’s Family Affordability Tax Credit and the Earned Income Tax Credit expansion have both been turned off for tax year 2026, which Coloradans file for in early 2027.

The state said this was due to “lower revenue growth,” meaning the credits should likely return in future tax years, when TABOR surpluses are once again expected.

This tax season, the 2025 return, is the last year for the Colorado enhanced tax credits for families with children.

Penalties - Colorado has imposed stricter penalties and fines on taxpayers in recent years. All Colorado taxpayers need to make sure that they do not owe any tax to the state when the return is filed. Even small amounts owed can generate a penalty. It really is an unfair system that seems to have popped up without warning.  If you think that you may owe tax, you should either increase your withholding or make estimated payments.  Call me if you have any questions.