Colorado Democrats Just Found a New Way to Tax Your Overtime

Colorado pulled a classic “Colo-RAD-oh” move:
Washington finally throws a bone to people who bust their tails for overtime and live on tips… and Colorado Democrats immediately dive for your wallet like it’s a piñata full of taxpayer dollars.

If it feels like they hate the idea of you keeping more of your own money, it’s because they keep voting that way.

I got a note from a reader that boiled down to this:

“I heard Colorado is still going to tax overtime and tips even though the feds just made them tax-free. Is that true?”

Here’s the answer in plain English:

• Federal government: just created a big new deduction so a chunk of your overtime and tip income isn’t taxed by the IRS. (H&R Block Tax preparation company)
• State of Colorado: passed a law specifically to keep taxing your overtime anyway starting with the 2026 tax year. Tips, for now, still get the federal/state break – but the political appetite under the Gold Dome says “don’t get too comfortable.” (Payroll.org)

So yes: your frustration is justified.
No: this isn’t an accident. It’s a choice. And it tells you everything about Colorado’s spending problem, not some made-up “revenue crisis.”

What D.C. just did: a rare win for working people

Trump’s One Big Beautiful Bill Act (OBBBA) actually followed through on something politicians love to promise and rarely deliver: a tax break aimed straight at people who work overtime and live on tips, not just people who have tax attorneys on speed dial.

Two big pieces:

• No tax (federally) on the overtime premium
  Starting with the 2025 tax year, the “overtime premium” part of your time-and-a-half is deductible from federal taxable income – up to $12,500 per person, or $25,000 for joint filers, with a phase-out starting at $150,000 in income ($300,000 joint). (Investopedia)
  Only the extra half-time piece counts. So if you earn $15,000 in overtime and $10,000 of that is just your normal rate, only the $5,000 “premium” can be deducted.
• Big new deduction for tips
  For tipped workers – servers, bartenders, stylists, hotel workers, etc. – the bill lets you deduct up to $25,000 in qualified tips from federal taxable income, also from 2025–2028, with the same income phase-outs. (Investopedia)

In normal-person terms:
If you’re grinding doubles, picking up shifts, living on tips, the federal government finally said, “You know what, keep more of that.” Not all of it – you still pay payroll taxes and state income tax – but it’s real relief.

And then Colorado walked in and said, “That’s cute. We’re going to undo that part for ourselves.”

Different clowns, same circus.

How Colorado taxes you: when “following federal law” is optional

Colorado is what’s called a “conformity” state. Most years, the state starts with your federal taxable income and then makes a couple of Colorado-specific tweaks – additions and subtractions – before hitting you with our supposedly “simple” flat income tax rate. (The Colorado Sun)

That setup has always meant:

When the feds create a new deduction, the default outcome is that Colorado taxpayers get it too, unless the legislature deliberately steps in and says otherwise.

You know, like when the state wants to pass through some federal change that raises your taxes? Then “we have to conform” becomes a moral imperative.

But when Washington does something that lets you keep more of your own paycheck, suddenly “conformity” is optional, flexible, and “complicated.”

And that’s exactly what happened with your overtime.

HB25-1296: the “we saw your raise and took it” bill

Enter Colorado House Bill 25-1296, the so-called “Tax Expenditure Adjustment” bill.

Buried in the legalese is this gem: starting with the 2026 tax year, Coloradans must add back any overtime pay that was excluded or deducted on their federal return when they calculate Colorado taxable income. (Colorado General Assembly)

The nonpartisan fiscal folks spell it out:

House Bill 25-1296 requires Colorado taxpayers to add back any federally deducted overtime compensation when calculating their Colorado taxable income beginning in tax year 2026. (Colorado General Assembly)

Translated from Bureaucrat to English:

• Feds: “You can knock up to $12,500 of overtime premium off your taxable income.” (H&R Block Tax preparation company)
• Colorado: “Cool. On your state return, put that amount right back in and pay our 4.4% tax on it anyway.” (Axios)

Take a worker who qualifies for a $10,000 federal overtime deduction. Washington says, “Keep more of that money.” Colorado says, “That’s adorable – we’ll still need our ~$440, thanks.”

And because the OBBBA deduction runs 2025 through 2028, this little “add-back” is worth about $48 million to $118 million per year to the state while it’s in effect. (Colorado General Assembly)

This wasn’t a rounding error. It was a strategic decision:
Protect state spending. Keep taxing your overtime.

They had a chance to stop taxing your overtime. They killed it in committee.

Now here’s the part that really blows up the “oops, complicated tax code” excuse.

During the August special session to plug a roughly $750 million budget hole created when Colorado’s tax code synced up with Trump’s bill, Republicans introduced HB25-S1020. (The Colorado Sun)

That bill would have:

• Repealed the overtime add-back so Colorado taxpayers actually got the same overtime break the feds just gave them; and
• Said plainly that future games like this count as tax increases under TABOR and must be approved by voters. (Colorado Capitol Watch)

The Democratic majority on the House State, Civic, Military, & Veterans Affairs Committee took one look and postponed it indefinitely – Capitol-speak for “killed it on arrival.” (Colorado Capitol Watch)

So let’s be crystal clear:

• Lawmakers knew exactly what the federal overtime break did.
• They knew HB25-1296 would wipe that out at the state level. (Payroll.org)
• They were offered a chance to restore that break for Colorado workers.
• And they chose to protect the revenue instead.

This is not “we’re confused.”
This is “we like your money better than you having it.”

What about tips?

This is where the rumor mill half-gets it and then runs off.

Under federal law now, qualified tips — up to $25,000 a year — can be deducted from federal taxable income from 2025 to 2028, subject to income limits. (Investopedia)

Colorado’s default is still to follow the federal taxable income starting point. And unlike overtime, the legislature hasn’t yet passed a law forcing you to add back those tip deductions for state purposes.

Axios Denver put it bluntly back in July:

Colorado won’t go along with the overtime break and will still tax overtime at 4.4%, even if Trump’s bill passes… but “if a federal law excluding tips from taxable income is signed, Colorado law would currently match that policy — unless lawmakers make changes in the future.” (Axios)

So as of right now:

• Overtime: the state has explicitly decoupled and will keep taxing what the feds just let you deduct, starting with your 2026 Colorado return. (VensureHR)
• Tips: Colorado is still lined up with the federal deduction — but the same crowd that couldn’t bear to let the overtime break stand is fully capable of coming for tips next.

And they’ve basically told you that.

Spending problem, not revenue problem

So why do they care so much about scraping tax off your overtime?

Because they’ve already spent the money.

Colorado’s own numbers admit it: after Trump’s bill, the state faced roughly a $750 million hole in the budget because of how our tax code tracks federal changes. (The Colorado Sun)

Instead of really tightening spending, Democrats in Denver:

• Rolled back multiple business tax breaks to raise around $150 million this year. (The Colorado Sun)
• Used reserves and one-time maneuvers. (The Colorado Sun)
• Pushed and passed Propositions LL and MM, which together increase taxes or keep excess revenue from high-income filers to fund universal school meals and SNAP. (Colorado General Assembly)
• And clung to the overtime add-back in HB25-1296 like it was oxygen.

This is a legislature that just asked voters to give up refunds and pay more to fund state programs – and voters said yes on school meals. Then the same legislature turns around and quietly makes sure your overtime is still taxable here, even when D.C. says it shouldn’t be.

That’s not a “revenue problem.”

That’s a spending addiction with a clever legal department.

TABOR was supposed to stop tricks like this

Colorado has the Taxpayer’s Bill of Rights (TABOR) for a reason: if politicians want more net revenue, they’re supposed to ask us directly.

HB25-1296 tried to get cute with that. The bill is full of language about “de minimis” and “incidental” revenue increases — because the Colorado Supreme Court once said tiny, incidental increases don’t count as a “tax increase” that requires a vote. (LegiScan)

So they claim:

“We’re not changing rates; we’re just ‘adjusting expenditures.’ Totally not a tax hike, please don’t look at the part where we quietly keep taxing income the feds just exempted.”

Advance Colorado has already sued, arguing that HB25-1296 violates TABOR by creating a back-door tax hike without voter approval. (Payroll.org)

Whether the courts buy that or not, the behavior tells you everything:

• When it’s time to protect government spending, they’re ruthless and creative.
• When it’s time to protect your paycheck, suddenly their hands are tied and “it’s complicated.”

Facts over fan clubs.

The ballot backstop: Initiative 119

Here’s the one hopeful piece in this mess.

There is a citizen initiative, Initiative 119 – “State Tax on Tips and Overtime Pay”, moving through the process right now. Its goal is pretty simple:

• Repeal the overtime add-back that HB25-1296 rammed through, and
• Permanently eliminate Colorado state income tax on both tips and overtime by letting you subtract those amounts from your Colorado taxable income. (Colorado General Assembly)

The Title Board has already set the language, which makes it crystal clear:
It would reduce the state income tax burden by about 1.1% by eliminating state tax on tips and overtime pay – roughly a $155 million tax cut, according to the official summary. (Colorado Secretary of State)

As of late 2025, it’s approved for title and is aimed at the November 2026 ballot, assuming supporters collect enough signatures. (The Rocky Mountain Employer)

In other words: if the politicians won’t let go of your overtime, the people still can.

So where do we go from here?

Here’s what all this boils down to:

• The federal government just told working Coloradans, “You can keep more of your overtime and tips.”
• Colorado Democrats looked at the same workers and said, “Not if we can help it.”
• They passed HB25-1296 to keep taxing overtime even after the feds stop. They killed a bill that would have fixed it. And now your overtime is the patch on a budget they refused to discipline.

I’m tired of hearing how “Colorado is a great place to work” from people who flinch every time the worker, not the government, gets a raise.

You shouldn’t have to hire a tax attorney to protect the money you made stacking shifts, bussing tables, tending bar, or staying late on a job site.

You shouldn’t need a constitutional amendment to keep the state out of your tip jar.

But as long as the folks under the gold dome act like every hour you work belongs to them first, we’re going to need both:

• Lawsuits,
• Ballot measures, and
• A whole lot of voters willing to say, politely but firmly:

“No. You don’t get to claw back my overtime after Washington finally stopped.”

Colorado doesn’t have a revenue problem.
Colorado has a spending problem and a honesty problem.

And until that changes, every time you see “overtime” on your paycheck, just remember:

Down in Denver, someone is already trying to figure out how to call your raise their money.