New Tax Deductions for 2026: What Colorado Workers Need to Know

Last updated: May 2026 | Sources: IRS.gov, Colorado Department of Revenue

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The 2026 tax year brought some of the most significant changes to individual federal income taxes in years, driven by the passage of the One Big Beautiful Bill Act (P.L. 119-21) on July 4, 2025. For Colorado workers — especially those in the hospitality, construction, healthcare, and service industries — these changes could mean meaningfully lower federal tax bills.

However, Colorado did not conform to all of these federal changes. In several important cases, deductions available at the federal level must be added back when calculating your Colorado state tax liability. Understanding exactly which deductions apply where is essential for Colorado filers in 2026.

This guide covers every major new deduction and credit for 2026, explains how they are claimed, and clarifies the critical differences between federal and Colorado treatment.

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The One Big Beautiful Bill Act: What Changed

P.L. 119-21 introduced several new individual tax provisions effective from 2026. The most significant for Colorado workers are:

1. A deduction for qualified tips (no tax on tips)
2. A deduction for qualified overtime compensation (no tax on overtime)
3. A deduction for car loan interest
4. An enhanced deduction for seniors
5. New Trump Accounts for children

Each of these is discussed in detail below.

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1. No Tax on Tips: The Qualified Tips Deduction

What it is

For tax years beginning after 2024 and ending before 2029, certain employees and self-employed individuals can deduct up to $25,000 in qualified cash tips received in eligible occupations directly from their federal taxable income.

This deduction appears on the new Schedule 1-A (Form 1040).

Who qualifies

To claim the qualified tips deduction, you must:

• Work in an occupation that the IRS has identified as one that customarily and regularly received tips on or before December 31, 2024
• Receive cash tips (including tips charged to credit cards that are passed through to you) from customers voluntarily — mandatory service charges are not qualified tips
• Have received tips of $20 or more per month (tips below this amount are not reportable)

Colorado industries most likely to benefit include restaurant and bar workers, hotel staff, casino workers, nail technicians, hairdressers, taxi and rideshare drivers, and delivery workers.

How to claim it

Your employer reports qualified tips in Box 12 of your W-2 using Code TP (new for 2026). The Treasury Tipped Occupation Code appears in the new Box 14b. You use these figures on Schedule 1-A when calculating your deduction.

Important: Tips are still subject to federal income tax withholding and FICA taxes (Social Security and Medicare). The deduction reduces your income tax liability, but it does not eliminate the payroll taxes that you and your employer pay on tip income.

Colorado treatment: addback NOT required for tips

Colorado conformed to the qualified tips deduction for 2026. This means tip income deductible at the federal level is also deductible for Colorado purposes. Colorado tipped workers get the full benefit of this deduction at both the federal and state level.

Official source: IRS — Schedule 1-A Instructions

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2. No Tax on Overtime: The Qualified Overtime Deduction

What it is

P.L. 119-21 introduced a deduction for qualified overtime compensation — the extra pay you receive for working more than 40 hours per week under the Fair Labor Standards Act (FLSA). The deduction applies only to the overtime premium (the extra 50% beyond the regular rate), not the entire overtime paycheck.

Like the tips deduction, this deduction is claimed on Schedule 1-A.

Who qualifies

The deduction applies to overtime compensation paid under the FLSA. This generally covers hourly workers in covered industries. Salaried employees who are exempt from FLSA overtime rules do not qualify.

Colorado industries with significant overtime workers include healthcare (nurses, hospital staff), construction and trades, transportation and logistics, manufacturing, and retail.

How to claim it

Your employer reports qualified overtime in Box 12 of your W-2 using Code TT (new for 2026). Only the premium portion of overtime qualifies — if you earn $20/hour and receive $30/hour for overtime, the qualifying portion is the extra $10/hour, not the full $30.

Colorado treatment: ADDBACK REQUIRED — critical for Colorado filers

This is the most important Colorado-specific difference for 2026. Colorado did not conform to the federal overtime deduction. Under Colorado House Bill 25-1296, if you claim the qualified overtime deduction on your federal return, you must add it back when calculating your Colorado taxable income.

This means the overtime deduction reduces your federal income tax but has no benefit for your Colorado state tax. Colorado workers who work significant overtime should be aware of this — your Colorado tax bill will be calculated as if the deduction does not exist.

Official source: Colorado HB 25-1296 and Colorado Department of Revenue — January 2026 Tax Policy Updates

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3. Car Loan Interest Deduction

What it is

P.L. 119-21 introduced a new deduction for interest paid on loans for new, US-assembled vehicles. This deduction is also claimed on Schedule 1-A.

Key limitations

• The vehicle must be assembled in the United States
• Income phase-outs apply — the deduction begins to phase out at higher income levels
• The deduction covers interest on personal vehicle loans, not business vehicle loans (business vehicle interest already has different deductibility rules)

Colorado treatment

Colorado has not yet issued definitive guidance on conformity with the car loan interest deduction for 2026. Given Colorado's general pattern of addbacks for 2026 federal deductions, Colorado filers should consult a CPA before claiming this deduction and counting on it reducing their Colorado tax.

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4. Enhanced Deduction for Seniors

What it is

P.L. 119-21 introduced an enhanced above-the-line deduction for qualifying seniors. The exact parameters depend on age, income, and filing status.

For seniors 65 and older, this deduction provides additional tax relief on top of the existing higher standard deduction already available to taxpayers 65 and older.

Colorado treatment

Colorado generally conforms to federal treatment of senior deductions. However, because Colorado uses its own rules for calculating taxable income starting from federal adjusted gross income (AGI), the practical effect on your Colorado return may differ from your federal return. A CPA can calculate the Colorado-specific impact.

Official source: IRS — New Schedule 1-A

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5. Trump Accounts: New Retirement Savings for Children

What it is

P.L. 119-21 created a new type of individual retirement account — officially called a Trump Account — for children under 18 with a valid Social Security number. Parents, guardians, or other authorized individuals can open these accounts.

Starting July 4, 2026, employers may contribute up to $2,500 per year to the Trump Account of an employee or a dependent of an employee. This contribution is excluded from the employee's gross income. Employer contributions appear in Box 12 of the W-2 using Code TA.

A separate pilot program provides a one-time government contribution of $1,000 for children who are US citizens born from January 1, 2025 through December 31, 2028.

Official source: trumpaccounts.gov

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Standard Deduction Amounts for 2026

While not new for 2026, the standard deduction amounts — which most Colorado filers use — are worth reviewing each year.

Colorado's standard deduction mirrors the federal standard deduction — the state does not have a separate state standard deduction amount.

Official source: IRS Revenue Procedure — Annual Inflation Adjustments

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Colorado-Specific Deductions and Credits for 2026

Beyond the federal changes, Colorado has its own set of state-level tax provisions worth knowing about.

Colorado Proposition MM — Standard or Itemized Federal Deduction Addback

Proposition MM, approved by Colorado voters, requires certain taxpayers to add back some portion of federal standard or itemized deductions when calculating Colorado taxable income. This is a Colorado-specific provision and requires careful calculation on your Colorado DR 0104.

Official source: Colorado Department of Revenue — Proposition MM

TABOR Refund

Colorado's Taxpayer's Bill of Rights (TABOR) requires the state to refund excess revenue to taxpayers when state revenues exceed constitutional limits. TABOR refunds are available to all Colorado individual income tax filers and are distributed as a credit on your Colorado return. Check the Colorado DR 0104 instructions each year for current refund amounts.

Colorado Child Tax Credit

Colorado offers a state child tax credit that supplements the federal Child Tax Credit. For 2026, the Colorado credit includes inflation adjustments to credit amounts and income thresholds. Qualifying Colorado families with children may claim this credit on their DR 0104.

Official source: Colorado Department of Revenue — Family Affordability Tax Credit

Colorado Child and Dependent Care Expenses Credit

Separate from the child tax credit, Colorado also offers a credit for child and dependent care expenses. Colorado House Bill 24-1134 modified this credit for 2026, eliminating restrictions based on federal tax liability. This means Colorado families can claim the credit even if their federal tax liability is zero.

Segal AmeriCorps Education Award Subtraction

Colorado allows a subtraction from Colorado taxable income for Segal AmeriCorps Education Award amounts included in federal AGI. Colorado House Bill 24-1240 expanded this subtraction for 2026.

First Responder Death Benefit Subtraction

Colorado Senate Bill 25-310 introduced a subtraction for 2026 for first responder death benefits — amounts received by surviving family members of Colorado first responders killed in the line of duty.

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New Schedule 1-A: How to Claim 2026 Federal Deductions

The IRS introduced Schedule 1-A as a new attachment to Form 1040 for 2026. This schedule is where you claim:

• The qualified tips deduction
• The qualified overtime deduction
• The car loan interest deduction
• The enhanced senior deduction

If you use tax software, it will prompt you for the relevant information from your W-2 Box 12 codes and walk you through Schedule 1-A automatically. If you file on paper, you must complete Schedule 1-A separately and attach it to your Form 1040.

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How Colorado's Addback Rules Affect Your Tax Bill

The interaction between federal deductions and Colorado addbacks is one of the most confusing aspects of Colorado tax filing for 2026. Here is a simplified example to illustrate.

Scenario: Maria works as a nurse in Denver and earns $80,000 in regular wages plus $12,000 in overtime during 2026.

• Federal return: Maria claims $12,000 in qualified overtime deduction on Schedule 1-A, reducing her federal taxable income.
• Colorado return: Maria must add the $12,000 overtime deduction back to her Colorado taxable income. Her Colorado taxable income is calculated as if the overtime deduction does not exist.
• Net result: Maria saves approximately $1,440 in federal income tax (assuming a 12% bracket). She saves nothing on her Colorado state tax (4.40% × $0 addback).

For a worker in a higher federal bracket, the federal savings could be significantly larger — but the Colorado treatment remains the same regardless of income level.

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When to Consult a Colorado CPA About 2026 Deductions

The 2026 tax changes are genuinely complex. A licensed Colorado CPA can help you:

• Correctly calculate your qualified tips and overtime deductions on Schedule 1-A
• Navigate Colorado's addback requirements so you do not inadvertently under-report Colorado income
• Determine whether you qualify for Colorado's child tax credit and dependent care credit
• Calculate the impact of TABOR on your Colorado return
• Plan ahead for 2027 when some of these provisions may expire or change

Find a licensed Colorado CPA: ColoradoAccountants.com Directory

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Official Resources

• IRS — One Big Beautiful Bill Act Tax Changes
• IRS — Schedule 1-A
• IRS General Instructions for Forms W-2 and W-3 — 2026
• Colorado Department of Revenue — January 2026 Tax Policy Updates
• Colorado HB 25-1296 — Overtime Addback
• Colorado DR 0104 — Individual Income Tax Return
• trumpaccounts.gov

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This article is for informational purposes only and does not constitute tax advice. Tax laws change frequently. For advice specific to your situation, consult a licensed Colorado CPA.

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