What’s new
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New brackets and a bigger standard deduction, a charitable deduction for people who don’t itemize, a new 0.5% floor for those who do, the 1099-K threshold back at $20,000, and Trump account contributions opening.
Tax year 2026 is the return you’ll file in early 2027. The seven tax rates are the same, but almost everything around them moved:
- Standard deduction: $16,100 single, $24,150 head of household, $32,200 married filing jointly. The brackets rose about 4% for inflation.
- Charitable gifts without itemizing: up to $1,000 of cash gifts, $2,000 on a joint return, on top of the standard deduction.
- Itemizers: the first 0.5% of AGI in charitable gifts is no longer deductible, and in the 37% bracket itemized deductions are worth at most 35 cents on the dollar.
- Form 1099-K: only over $20,000 and 200 payments. Businesses send a 1099-NEC or 1099-MISC only at $2,000 or more, up from $600.
- Trump accounts: contributions opened July 4, 2026, up to $5,000 a year per child.
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The tax rates did not change. Almost everything around them did. This is what moved on the return you are filing now, why your tax may be a little lower on the same income, and why the refund probably didn’t move with it.
The seven federal rates, 10% through 37%, are now permanent; the 2025 tax law removed the expiration date that had hung over them since 2017. What changes each year is where each rate starts and stops.
For 2026 the brackets moved up about 4% for inflation, which means a little more of your income is taxed at each lower rate before the next one kicks in. On an unchanged income, that is a few hundred dollars less tax. Whether you notice it in April is another matter.
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The 2017 tax cuts were set to expire after 2025. The 2025 law made most of them permanent and raised the standard deduction and the child tax credit. Here is what carried forward, what changed in the fine print, and what to do if your 2025 return missed something.
The 2025 tax law was signed July 4, 2025, and much of it applied right away to the 2025 return. Two of its changes touch nearly every household: a larger standard deduction and a larger child tax credit.
Both are now permanent, with no expiration date, and rise with inflation each year. “Permanent” means until Congress changes it, which is also what it meant in 2017.
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A dozen smaller changes took effect with the 2026 tax year. Most touch one kind of household: parents of young children, people paid through apps, teachers, gamblers, anyone with a 529 plan. Find yours.
The 2025 tax law changed more for 2026 than any year since 2018. The big items, the brackets, the charitable deduction, the Marketplace credit, the four deductions through 2028, each have their own article.
This one collects the rest: a dozen smaller changes that each matter a great deal to the household they touch and not at all to anyone else.
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If you take the standard deduction and give to your church or a charity, this is the first year since 2021 that the gift counts on your federal return: up to $1,000, or $2,000 on a joint return. If you itemize, the rule moved the other way.
Nine out of ten taxpayers take the standard deduction, and for most of them a gift to charity has made no difference on the return since 2017, when the standard deduction nearly doubled. Starting with tax year 2026, people who take the standard deduction can deduct cash gifts to charity on top of it: up to $1,000, or $2,000 on a joint return.
The deduction is permanent, with no expiration date, which is more than can be said for several other 2026 changes.
Tips, overtime, car loan interest and the senior deduction →
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No tax on tips and overtime, the $6,000 senior deduction, car loan interest, who counts as a tipped worker, the bigger standard deduction and SALT cap, and what business owners gained. Plus how to fix a 2025 return that missed them.
The 2025 tax law applied right away to the return filed in early 2026. The changes most people should check:
- Four new deductions for 2025 through 2028: tips (up to $25,000), overtime (up to $12,500, or $25,000 joint), the $6,000 senior deduction, and car loan interest on a new U.S.-assembled vehicle (up to $10,000).
- Who counts as tipped: the IRS list goes well past restaurants, to plumbers, electricians, hair stylists, tutors, rideshare drivers and more.
- Bigger and permanent: the larger standard deduction, the $40,000 SALT cap, a $2,200 Child Tax Credit, a partly refundable adoption credit, and more ways to use a 529 plan.
- For business owners: 100% bonus depreciation, $2.5 million Section 179, and research costs deductible again.
If your 2025 return missed one of these, an amended return can usually claim it for up to three years.
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The deduction for state and local taxes jumped from $10,000 to $40,000, and $40,400 for 2026. Above about $500,000 of income it shrinks back toward $10,000, with a hidden tax rate of about 45% along the way.
SALT is the itemized deduction for state income tax and property taxes. It was capped at $10,000 from 2018 through 2024, which is why so many Colorado homeowners stopped itemizing. The cap is $40,000 for 2025 and $40,400 for 2026, so itemizing may pay again. (See Itemized Deductions vs. the Standard Deduction.)
The catch: once modified AGI passes $505,000 for 2026 (the same line for single and joint filers), the cap drops 30 cents for every dollar over, until it’s back to $10,000 at about $606,000. In that band, the 35% bracket works out to about 45.5%. Timing income, retirement contributions, and Colorado’s pass-through entity tax for business owners can help. The higher cap ends after 2029.
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No more federal credits for electric cars bought after September 30, 2025, or for solar, windows, doors, furnaces and heat pumps after December 31, 2025. What still carries forward, and what Colorado still offers.
- Electric vehicles: the $7,500 new and $4,000 used EV credits ended for vehicles acquired after September 30, 2025. “Acquired” means a binding contract and a payment by that date.
- Home improvements: the credit for insulation, windows, doors, furnaces, central air, water heaters and heat pumps ended for anything placed in service after 2025.
- Solar, batteries, geothermal: the 30% credit ended for systems completed after 2025. A December deposit on a January installation doesn’t count.
An unused solar credit from earlier years still carries forward, so keep track of it. Colorado’s own EV credit is $750 for 2026. (See Colorado changes for 2026.)
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One reference table: standard deduction, brackets, IRA, 401(k) and HSA limits, the gift exclusion, mileage rates, the Colorado rate and the TABOR refund, side by side for 2025 and 2026.
A few of the most-asked numbers for 2026:
- 401(k) $24,500 (catch-up $8,000 at 50+, $11,250 at 60–63). IRA $7,500 ($1,100 catch-up).
- HSA $4,400 self-only, $8,750 family.
- Gift exclusion $19,000 per person. Estate exemption $15 million.
- Mileage: 72.5 cents a mile January through June, 76 cents from July 1.
- Colorado: 4.40%, and no TABOR refund for 2026.
The full side-by-side table, with brackets and standard deductions for both years, is on the article page.
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The IRS no longer mails refund checks by default. Without direct deposit on your return, your refund can be held for weeks. This applies to everyone, and almost nobody knows it.
Under an executive order, the federal government began phasing out paper checks on September 30, 2025. If your return has no bank account on it, the IRS holds the refund and sends notice CP53E. You have 30 days to add direct deposit through your IRS Online Account; otherwise a paper check goes out about six weeks after the notice.
If you don’t have a bank account, you can claim an exception online or by phone. A wrong account number gets no second notice, just a check weeks later. We confirm your direct deposit information every year, so tell us if you’ve changed banks.
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Changes already written into law with a start or end date: Roth catch-ups, the Saver’s Match, a new scholarship credit, the 2028 end of the tips and overtime deductions, and the 2030 SALT reset.
These changes are already law, written to start or stop on a set date:
- 2026–2027: 401(k) catch-up contributions must go Roth for people 50+ who earned over $150,000 the year before.
- 2027: the Saver’s Match puts up to $1,000 directly into lower earners’ retirement accounts, and a new scholarship tax credit of up to $1,700 begins. Colorado has opted in.
- End of 2028: the deductions for tips, overtime, car loan interest and the $6,000 senior deduction expire, and so does the $1,000 Trump account deposit for newborns.
- 2030: the SALT cap drops from about $41,600 back to $10,000.
The tax rates, the larger standard deduction, the Child Tax Credit and the $15 million estate exemption are now permanent.
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What Congress and Colorado voters are still deciding: marketplace health insurance credits, gambling losses, the home sale exclusion, tariff rebate checks, and Colorado’s graduated income tax measure.
None of these are law yet. Status as of mid-October 2026:
- Marketplace health insurance credits: the House passed an extension in January. The Senate hasn’t voted.
- Gambling losses: a bill to restore the full deduction for 2026 cleared Ways and Means 38–5 in September.
- IRS service and scam-victim relief: a bipartisan package is the likeliest piece of any year-end deal.
- Home sale exclusion: bills to double or end the tax on selling your home are still in committee.
- Tariff rebate checks: no bill has passed either chamber. “Register for your check” messages are scams.
- Colorado: Amendment 87 (graduated rates up to 8.4%) and Proposition 136 (a 4.4% cap) are on the November 3 ballot.
IRS matters
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What happens if you don’t file, why the IRS’s substitute return usually overstates what you owe, how returns can be prepared without your old records, and how far back you need to go.
If you’ve missed a year or several, you’re not alone, and it’s almost always better to deal with it before the IRS does. Penalties for not filing grow at 5% of the unpaid tax per month, up to 25%, on top of interest.
When you don’t file, the IRS may prepare a “substitute for return” from the W-2s and 1099s it has. These usually overstate what you owe because they don’t include your deductions, dependents, or business expenses. We can replace them with accurate returns.
You don’t need all your old records. We can get your income information from the IRS. In most cases the IRS asks for the last six years to bring you back into compliance, and refunds are available only for about the last three.
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The IRS’s annual list of the most common tax scams (phishing, fake charities, bogus credit claims, ghost preparers) and how to protect yourself.
Each spring the IRS publishes its “Dirty Dozen,” a list of the scams it sees most. The 2026 list (released March 5, 2026):
- IRS impersonation by email and text, often with QR codes leading to fake IRS websites
- AI-generated phone calls that sound like IRS agents, with spoofed caller ID
- Fake charities, especially after disasters
- Bad tax advice on social media: viral “tax hacks” that lead to false claims
- Identity theft through IRS Online Account, including scammers offering to “help” you set one up
- Fake undistributed capital gains claims (bogus Forms 2439)
- The nonexistent “Self-Employment Tax Credit”
- Ghost preparers who won’t sign the return they prepared
- Inflated non-cash charity deductions, such as conservation easement and art schemes
- Overstated withholding on fabricated W-2s or 1099s to create a refund
- Phishing and malware aimed at tax professionals
- “Offer in Compromise mills” that charge large fees to people who don’t qualify
How to protect yourself: The IRS normally contacts you first by mail. It doesn’t demand payment by gift card, wire, or cryptocurrency, and it doesn’t threaten arrest. If in doubt, don’t click; call us or the IRS at a number you look up yourself. An IRS Identity Protection PIN (free at IRS.gov/ippin) keeps anyone else from filing a return in your name. Your preparer should always sign your return and include a Preparer Tax Identification Number (PTIN). Every return we prepare is signed by an Enrolled Agent.
Reporting: forward phishing emails to phishing@irs.gov, report other schemes at IRS.gov/SubmitATip, and report identity theft at IRS.gov/idtheft.
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How the IRS chooses returns to examine, why most “audits” are a letter rather than a visit, the fourteen items that most often draw attention, and the habits that keep a return defensible.
The great majority of IRS examinations happen by mail, and the most common IRS letter of all is not an audit but a CP2000 — a computer match showing a W-2, 1099 or 1098 that was issued in your name and never made it onto the return. The IRS makes first contact by letter, never by phone, email or text.
Returns are chosen by computer scoring against what is typical for the income level, by document matching, by connection to another return under examination, and occasionally at random. The items that most often draw a second look: income left off, the Earned Income Credit, education credits, a Schedule C that loses money year after year, round-number and personal expenses, cash businesses, outsized charitable deductions, rental losses, big income swings, high income, divorce mismatches, foreign accounts, the digital asset question, and not filing at all.
The only defense that works is an accurate return with the records behind it. When a federal change comes through, Colorado expects an amended return within 30 days.
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What common IRS letters mean, why you shouldn’t ignore them, and how we handle notices, audits, and collections.
Most IRS letters aren’t emergencies, but every one has a deadline, and ignoring it is how a small problem becomes a big one. The letter names a notice number in the top or bottom right corner, such as CP2000 or CP14, and that tells us what the IRS wants.
- CP2000, a proposed change. The IRS matched your return against W-2s and 1099s and thinks something was left off. It’s a proposal, not a bill. You can agree, partly agree, or disagree, and the IRS is often wrong about the cost basis of stock sales.
- CP14 and later balance-due notices. These are reminders that tax is owed. They escalate in steps, so the sooner a balance is dealt with, the more options you have.
- Final notice of intent to levy (LT11 or Letter 1058). Take this one seriously. You generally have 30 days to request a hearing that protects your appeal rights.
- Audits. Most are done by mail and ask for documents supporting a few items. They aren’t the in-person ordeal people picture.
- Collections. Installment agreements, temporary hardship status, and, for some people, an offer in compromise. Be wary of companies that advertise “pennies on the dollar” settlements. (See The IRS “Dirty Dozen” Tax Scams.)
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When a joint refund is taken for one spouse’s old debt (Form 8379), and when the IRS wants you to pay for a joint return that was your spouse’s doing (Form 8857): the three types of innocent spouse relief, the two-year deadline, and what the IRS weighs.
Signing a joint return makes each spouse liable for all of the tax, penalties and anything found later. A divorce decree that assigns the tax to one spouse binds the two of you, not the IRS.
Injured spouse relief is for a correct return whose refund was offset against one spouse’s separate debt: child support, a defaulted student loan, back taxes from before the marriage. Form 8379 allocates the refund and returns your share.
Innocent spouse relief is for a liability: an understatement caused by the other spouse’s items, or a balance the other spouse never paid. Three types exist, two of them with a two-year clock from the first collection action, and the IRS notifies your former spouse that you filed.
Is it real? The IRS starts by mail. It doesn’t call, text, or email demanding immediate payment, and it never asks for gift cards. If you’re unsure, don’t call the number on a suspicious letter; we’ll verify it.
As an Enrolled Agent, I’m licensed to represent you before the IRS. With your signed power of attorney, I can talk to the IRS for you, so you don’t have to. For large balances or complex collection cases, I work with tax attorneys who are reasonably priced. Bring us the letter and the return it refers to. Colorado Department of Revenue letters are welcome too. Call 303-734-1040.
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How a thief can file a return in your name and take your refund, the free six-digit Identity Protection PIN that stops it, and what to do if your e-filed return is rejected because your Social Security number was already used.
Tax identity theft happens when someone files a return with your Social Security number to steal a refund. You usually find out when your own e-filed return is rejected.
The fix: an Identity Protection PIN. The IRS issues a six-digit IP PIN that must be on any return filed with your Social Security number. Without it, a return is rejected. Anyone can get one:
- Sign in to your IRS Online Account at IRS.gov/account and enroll under your profile. You’ll verify your identity first.
- You can enroll for continuing years or just one. A new PIN is issued each January.
- Get one for your spouse and your dependents too. Children’s numbers are prime targets, because no one checks them for years.
- Give it only to your tax preparer. The IRS never calls, texts or emails to ask for it.
If it already happened: file your return on paper, attach Form 14039 (Identity Theft Affidavit) if the IRS hasn’t already contacted you, and respond quickly to any IRS letter asking you to verify your identity, such as Letter 5071C. You’ll be enrolled in the IP PIN program automatically afterward. We can help with each step. (See the Dirty Dozen tax scams.)
Collections process
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What happens, in order, when a tax bill goes unpaid: the five letters and the two that matter, the 30-day and 90-day letters, the lien, the levy, the hearing you are entitled to, and the six ways to stop it.
The CP14 → CP501 → CP503 → CP504 → LT11 ladder and what each rung can actually do; why the CP504 is not the final notice and the LT11 is; the 30-day audit letter, the 90-day notice of deficiency, the 30-day lien notice and the 60-day letters sorted out; the federal tax lien, withdrawal, discharge and subordination; bank levies and the 21 days, wage garnishment, the 15% Social Security levy; Collection Due Process and equivalent hearings and Form 12153; short-term plans, installment agreements at $10,000 and $50,000, partial-pay plans, currently-not-collectible status, the offer in compromise and bankruptcy; passports, private collectors, the trust fund recovery penalty and the ten-year clock; and Colorado’s shorter ladder.
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The ladder from a 180-day plan to a streamlined installment agreement under $50,000, filing Form 9465 with the return so the collection letters never start, the 2026 fees and the reduced late-payment penalty, when the lien is filed, and Form 433-A: the financial statement the IRS requires above $50,000, for partial-payment plans, currently-not-collectible status, and every offer in compromise.
Below $50,000 an installment agreement is close to automatic: Form 9465 can go in with the return, or the plan can be set up online in ten minutes for a $22 fee, and the IRS will usually accept any payment that clears the balance in 72 months. Direct debit keeps the lien off for balances between $25,000 and $50,000. Interest keeps running; the late-payment penalty is cut in half while the plan is in effect.
Above $50,000, or when the full amount can’t be paid, the IRS wants Form 433-A (or the short 433-F): every asset at quick-sale value, every debt, and monthly income against the IRS’s own living-expense standards for Douglas County. Income minus allowed expenses is what the IRS expects each month, and net equity in assets is the floor for an offer. The same statement supports a partial-payment plan, currently-not-collectible status, and the offer in compromise, so building it carefully, with the proof attached, is most of the work.
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When a lender forgives a debt and sends a 1099-C, the amount is income unless you were insolvent the day before. Who counts as insolvent under §108, what assets and debts count (the retirement account and the house do, even though creditors can’t reach them), how much is excluded, the Publication 4681 worksheet as an online calculator you can print, three worked examples, Form 982 and the attribute reduction, and where the same balance sheet fits in IRS collections.
You are insolvent, for this purpose, when your total debts exceed the fair market value of everything you own, measured the moment before the debt was canceled. The debt being forgiven counts as a debt, and the retirement account and the house count as assets even though creditors can’t touch them. If you were insolvent, the forgiven amount is excluded from income up to the amount of the shortfall, on Form 982. Insolvent by $8,000 with $20,000 forgiven means $8,000 excluded and $12,000 reported.
The page has the IRS’s 38-line worksheet from Publication 4681 as a calculator: enter the debts and the values as of the cancellation date and it computes the insolvency and tells you what goes on Form 982. Print it and keep it with the statements. The same arithmetic, with a budget added, is the Form 433-A that decides what the IRS will accept when a tax debt itself can’t be paid.
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Why the IRS accepts less than it is owed, who qualifies and who does not, how the offer amount is figured, what comes first, and why we prepare the returns and refer the offer itself to attorney Tyler Murray.
The program is a backstop: a lawful way for someone who got into a hole to settle for what they can actually pay and go back to being a current taxpayer. The page covers the three grounds, reasonable collection potential (net equity plus 12 or 24 months of disposable income), the IRS expense standards, the filing-and-current conditions that come first, the $205 fee and low-income waiver, lump-sum vs. periodic offers, the five-year compliance period, appeals, the offer-mill warning, and the Colorado side.
AI tax prep
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AI can draft a return in seconds. Here are ten reasons to think twice before you let it prepare yours, from who is liable for mistakes to who answers when the IRS writes.
Artificial intelligence is a useful tool, and it’s getting better. But preparing an income tax return takes the right questions, current law, your history, and someone who signs the return and stands behind it. The ten concerns:
- You’re responsible for every number, not the AI.
- No one signs it, and no one stands behind it.
- It only knows what you tell it, including the 1099 you forgot.
- It doesn’t ask the questions that matter.
- Confident is not the same as correct.
- Tax law changes, and AI may be working from last year’s rules.
- Your Social Security number goes into a chatbot.
- Mistakes surface years later, with penalties and interest.
- When the IRS writes, AI can’t represent you.
- It doesn’t know your history or your state.
Use AI to learn or to organize your questions. When it’s time to prepare and sign the return, have a person do it. If AI already prepared a return for you and something doesn’t look right, or a letter has arrived, we can review it and fix it. (See Got a Letter from the IRS?)
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The same story in under a minute: a return “done” in 0.9 seconds, the questions AI never asked, and the IRS letter that shows up two years later.
A short, old-movie-style film with sound. Press play and it runs on its own, or scroll through at your own pace. It follows one return prepared by AI, from the instant refund to the bill that arrives two years later, and asks who answers for it when no one signed it.
Turn your sound on for the full effect. It works on phones and computers.
Individual tax
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A searchable cheat sheet: the forms you receive, the forms that make up your return, the forms for dealing with the IRS, every common IRS letter and notice from CP14 to LT11 with what it wants and how long you have, and what AGI, MAGI, NIIT, QBI, RMD, QCD, IRMAA, OIC and FBAR mean.
Tables of the W-2, W-2G, 1099-NEC, 1099-MISC, 1099-K, 1099-INT, 1099-DIV, 1099-B, 1099-OID, 1099-R, 1099-G, 1099-S, 1099-C, 1099-Q, 1099-SA, SSA-1099, 1098, 1098-T, 1098-E, 1095-A, 5498 and K-1; the 1040 and Schedules 1, 2, 3, A, B, C, D, E, F, SE, H, EIC and 8812; Forms 2441, 8863, 8889, 8962, 8606, 5329, 8880, 8995, 8829, 4562, 4797, 6252, 8582, 8824, 4684, 8283, 6251, 8960, 8959, 8615, 2555, 1116, 8938, FBAR, 8854, 709, 706 and 1041; the W-4, W-9, W-7, SS-4, 1040-ES, 2210, 4868, 1040-X, 8822, 9465, 656, 433-A, 433-F, 2848, 8821, 4506-T, 843, 8379, 8857, 14039, 8332, 8888, 12153 and the CP2000 notice; the business forms 1065, 1120-S, 1120, 2553, 8832, 7004, 941, 940, 8594, 3115 and 7203; forty-seven IRS letters and notices (the CP14 → CP501 → CP503 → CP504 → LT11 collection ladder, CP2000, CP3219A, the 30-day and 90-day letters, the identity-verification letters, CP523, CP508C and the rest) with the deadline each one carries; and a glossary of acronyms. Each links to the page here that explains it. Includes a section on Form 8822, change of address, the one everyone forgets.
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The income lines by filing status and age, the much lower lines for dependents and teens with summer jobs, seniors living on Social Security, when you must file anyway, and why filing often pays even when it isn’t required.
For 2026 a single person under 65 generally must file with gross income of $16,100 or more; married filing jointly, $32,200; at 65 and older the lines are higher. Social Security usually doesn’t count unless part of it is taxable.
- Must file anyway: $400 or more of self-employment profit, marketplace insurance with premium help, an HSA withdrawal, or an early-withdrawal penalty.
- Dependents: must file with more than $1,350 of investment income, more than $16,100 of wages, or $400 of self-employment profit. A teen who mows lawns can owe self-employment tax.
- Should file anyway: to get withheld tax back, or for refundable credits like the Earned Income Tax Credit and the Child Tax Credit. Unclaimed refunds are lost after three years.
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Some taxpayers call these insults. IRMAA, the Child Tax Credit, Roth IRAs, rental losses, the 3.8% investment tax, depreciation recapture, and two dozen other breaks that shrink or vanish as income rises.
Most tax breaks come with an income limit, and the limit is often not what people expect. Cross it and the credit shrinks, the deduction disappears, or a surcharge appears. The IRS calls it a phase-out.
This page lists more than thirty of them: the Medicare premium surcharge known as IRMAA, the Child Tax Credit, the education credits, student loan interest, the $25,000 rental loss allowance, Roth and traditional IRA limits, the new deductions for seniors, tips, overtime, and car loans, the QBI deduction for service businesses, the SALT cap, the Net Investment Income Tax, the AMT, and the surprises that come with selling a rental, inheriting an IRA, or getting a bonus.
Each one gets a plain-English explanation, the 2026 threshold, and, in blue, what the person paying for it tends to think about it.
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Mortgage interest, state and local taxes, charitable gifts, and medical expenses: what can be itemized, the current SALT limit, and how to tell whether itemizing beats the standard deduction.
You get to use whichever is larger: the standard deduction or the total of your itemized deductions. For 2026 the standard deduction is $16,100 for single filers, $24,150 for heads of household, and $32,200 for married couples filing jointly.
The main itemized deductions are mortgage interest, state and local taxes, charitable gifts, and medical expenses above 7.5% of income. The 2025 tax law raised the state and local tax (SALT) cap from $10,000 to $40,000 for 2025 and $40,400 for 2026, with a reduction for incomes over $505,000.
Starting in 2026, people who don’t itemize can also deduct up to $1,000 of cash gifts to charity ($2,000 married filing jointly).
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When a casualty or theft loss is deductible (generally only when tied to a declared disaster), how the loss is calculated, and the option to claim it on the prior year’s return.
Damage to your home, car, or belongings from a fire, storm, flood, or theft is deductible only if it’s tied to a federally declared disaster. Starting in 2026, certain state-declared disasters also qualify. Everyday losses such as a car accident or burglary generally aren’t deductible.
The loss is the smaller of the drop in value or your cost basis, minus insurance. It’s then reduced by $100 per event and by 10% of your income. For qualified disaster losses the reduction is $500 per event with no 10% floor, and you can claim the loss even if you take the standard deduction.
You can choose to claim a disaster loss on the prior year’s return, which can bring you a refund sooner.
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Several W-2 jobs, no federal tax withheld on any of them, and a big tax bill when the return is prepared. Why it happens, how we handle it, and how to keep it from happening again.
Every tax season brings a few bad surprises, and this is one of the most common. Picture six W-2s at $15,000 apiece, with a big fat zero in Box 2 on every one of them. How does that happen? Each employer figures withholding as if their job is the only one you have. A $15,000-a-year job barely clears the standard deduction, so the payroll system sees nothing worth withholding. Social Security and Medicare still come out, but federal income tax doesn’t. Six employers each decide you owe nothing.
Then it comes time to prepare your tax return for the previous year, the IRS adds it all up, and you’ve earned $90,000 with nothing paid in. Federal tax on that is roughly $11,000 for a single filer, and the IRS may add an underpayment penalty for not paying as you went. Nobody did anything wrong, exactly. Six payroll departments just never talked to each other. The same thing happens to married couples who both work: each employer withholds as if that paycheck is the household’s only income, and the combined income lands in a higher bracket than either W-4 assumed.
If it’s already happened, we have a solution: we can include an installment agreement request with your tax return, so you pay the balance over time instead of all at once. Interest and penalties still apply until it’s paid, but it turns an ambush into a monthly payment.
To keep it from happening again, get your withholding fixed now, whatever time of year it is. The key is knowing your tax rate on your total income from all jobs. In the example above, $11,000 of tax on $90,000 is about 12%, so each $15,000 job needs to withhold about $1,800 a year, or roughly $70 a paycheck if you’re paid every two weeks. Give each employer a new W-4 and enter that extra amount in Step 4(c). Married couples who both work can check the box in Step 2 instead. The IRS Tax Withholding Estimator can help with the math, or come see us at the Tax Shop and we’ll run the numbers before the Bermuda Triangle swallows your refund.
Self-employed? Read the companion topic, Lost at Sea: Self-Employed Without Books.
Also known as: The Phantom Withholding · Surprise! You Were Underwithheld · Death by a Thousand Paychecks · The “I Thought They Were Taking Taxes Out” Revue
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A refundable credit worth up to $8,231 for working families in 2026, who qualifies, and the mistakes that delay refunds or trigger audits.
The Earned Income Tax Credit (EITC) is one of the most valuable credits for working people with low to moderate income. It’s refundable: if the credit is larger than the tax you owe, the IRS sends you the difference.
For 2026 the maximum credit is:
Qualifying children Maximum credit None $664 One $4,427 Two $7,316 Three or more $8,231 The credit is based on your earned income from wages or self-employment and phases out as income rises. Married couples with three children can qualify with income up to about $70,000. You’ll also need a valid Social Security number, investment income of $12,200 or less, and, if you have no qualifying children, you must be between 25 and 64.
Where it goes wrong. EITC errors are among the most common reasons returns get audited. The usual problems are claiming a child who didn’t live with you for more than half the year, two parents claiming the same child, and self-employment income reported incorrectly. That’s why we ask detailed questions about who lives with you and for how long. Preparers are required to.
Timing. By law, the IRS can’t issue refunds that include the EITC before mid-February, even if you file in January.
Colorado has its own earned income credit, figured from the federal credit, so qualifying for one usually means a benefit on your state return too.
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Divorced or separated, and the other parent claims the child? The earned income credit and head of household still belong to the parent the child lives with. How the benefits split, a $7,000 example, and a step-by-step for preparers on how it goes on the return.
“Claiming a child” is five separate tax benefits. Two of them, the dependent and the child tax credit, can be released to the other parent with Form 8332 or a decree. Three cannot: the earned income credit, head of household, and the child and dependent care credit stay with the parent the child lived with for more than half the year, no matter what the decree says.
A divorced parent who files single with no child on the return because “my ex claims her” is leaving the EITC, the head of household standard deduction, and Colorado’s matching credits on the table. In a 2025 example on the page, a mother earning $25,000 with one child was short about $7,000 between the IRS and Colorado. Her ex kept the child tax credit; nothing changed on his return.
The fix is a 1040-X. The page also has a preparer section on entering the child as a non-dependent qualifying child so the software gives EITC and head of household without the child tax credit, and the one-paragraph explanation for Part II that heads off the duplicate-claim letter.
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Four temporary deductions from the 2025 tax law: who qualifies, how much, and the income limits.
The 2025 tax law created four new deductions that run from 2025 through 2028. All four are available whether you itemize or take the standard deduction, and all four phase out at higher incomes.
- Tips. Up to $25,000 of qualified tips a year, for workers in occupations where tipping is customary, including both employees and self-employed workers. The tips must be voluntary. Mandatory service charges don’t count. The deduction phases out above $150,000 of income for single filers and $300,000 for joint filers.
- Overtime. Up to $12,500 a year, or $25,000 on a joint return, but only the extra part of overtime pay. If you earn $30 an hour and get time-and-a-half, the deductible part is the $15 premium, not the full $45. It must be overtime required by federal wage law. The same income limits apply.
- Seniors. An extra $6,000 deduction for each person 65 or older, so $12,000 for a married couple who both qualify. It’s on top of the additional standard deduction seniors already get, and it phases out above $75,000 of income single or $150,000 joint. It’s often called “no tax on Social Security,” but that’s not what it does: it lowers taxable income for anyone 65 or older, whether or not they collect benefits.
- Car loan interest. Up to $10,000 a year of interest on a loan for a new vehicle bought for personal use, with final assembly in the United States, and a loan taken out after 2024. Used cars and leases don’t qualify. It phases out above $100,000 single or $200,000 joint.
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For households with income somewhere between $150,000 and $250,000 and up, where tax breaks start to shrink and surcharges start to appear. Most are slopes; a few are cliffs. Either way, the practical effect is a tax rate higher than the bracket suggests, and none of it shows on the brackets.
Most tax breaks come with an income limit, and the limit is often lower than people expect. Cross it and the credit shrinks, the deduction disappears, or a surcharge appears.
The IRS calls it a phase-out. The tax code has more than thirty of them, and a household that thinks of itself as comfortable rather than rich can trip several in the same year. A few are cliffs: one dollar over the line and the whole benefit is gone. Most are slopes, where the benefit drains away over a band of income. Either way, every added dollar of income is taxed and also costs part of a credit or deduction.
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For anyone with a big medical year, a nursing-home bill, or long-term care premiums. Most people never clear the floor; the ones who do are usually retirees, and the item they most often leave off is the one deducted from every Social Security check.
Medical expenses are one of the four main itemized deductions, alongside mortgage interest, state and local taxes, and charitable gifts. They come with a floor: only the part of your medical costs above 7.5% of adjusted gross income counts, and even that only helps if your itemized deductions together beat the standard deduction, which for 2026 is $16,100 single, $24,150 head of household and $32,200 joint, plus $2,050 single or $1,650 per spouse at 65.
The arithmetic rules most people out. The people who clear it are usually retirees with a nursing-home year, a long hospital stay, or large long-term care premiums.
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The three tests, who counts as a qualifying person, the parent-in-assisted-living exception, the $24,150 standard deduction and wider brackets, and the claims that bring letters.
Head of household requires all three: unmarried (or considered unmarried) on December 31, more than half the cost of keeping up the home, and a qualifying person living with you more than half the year. A dependent parent is the one exception to living with you.
For 2026 it carries a $24,150 standard deduction against $16,100 for single, and the 12% bracket runs to $67,450 instead of $50,400, typically $1,000 to $1,500 a year for a single parent before any credits.
The errors the IRS checks: both parents claiming it for the same child, a partner’s child as the qualifying person, a spouse who left in August rather than before July, and a 50/50 roommate paying half the rent.
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How the five-step W-4 works, the two-earner mistake behind most surprise balances, the 2026 lines for tips and overtime, the pension and Social Security withholding forms, and the safe harbors that avoid the penalty.
A refund is withholding that was too high; a balance is withholding that was too low. The W-4 sets the amount, and most were filled out on the first day of a job years ago.
Two earners in one household are the usual problem: each employer withholds as if its wages were the family’s only income, and if both spouses list the children in Step 3 the child credit is taken off twice. The fix is the Step 2(c) checkbox and children on one W-4 only.
Retirees have their own forms: W-4P for pensions, W-4V for Social Security (7%, 10%, 12% or 22%), and W-4R for IRA withdrawals, where the 10% default is almost always too little. Heavy withholding on a December RMD can cover the whole year.
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Why Box 1 is less than your salary and Box 3 is more: the 401(k), health premiums, FSA and HSA that come out before tax, the life insurance, company car, S corporation health insurance and bonuses that go in, the 2026 limits, the Box 12 codes, and three calculators — build your Box 1 from the pay stub, the employer’s gross-up, and taxable group life.
Box 1 is gross pay minus the deductions the law excludes from income tax, plus the benefits the law says are taxable even though they never showed up in a paycheck. Retirement deferrals come out of Box 1 but not out of Social Security and Medicare wages; cafeteria-plan deductions (health premiums, FSA, HSA, dependent care) come out of all three boxes. That one rule explains why the three numbers differ.
Going the other way: employer-paid life insurance over $50,000 (code C), personal use of a company car, health insurance an S corporation pays for its owner (Box 1 only), bonuses, taxable moving money, stock option spreads and gross-ups all raise Box 1. The page lists the 2026 limits ($24,500 401(k), $4,400/$8,750 HSA, $3,400 FSA, $7,500 dependent care, $184,500 wage base) and decodes Box 12 and Box 14.
Three calculators: one builds the three wage boxes from the last pay stub and estimates what the pre-tax deductions saved; one does the employer’s gross-up (gross = net ÷ (1 − the withholding rate)); one computes the taxable cost of group life from the IRS age table.
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The shopping-cart idea: one K-1 from one entity, with income from different departments that each ring up at their own rate on your 1040. The three kinds (Forms 1065, 1120-S and 1041), why you are taxed on your share and not your distribution, when K-1s arrive and which year they belong to, the basis, at-risk and passive limits on a loss, and the Colorado SALT parity credit.
A K-1 is the slip a partnership, S corporation, or trust sends each owner or beneficiary to say: here is your share of what we did this year. The entity pays no income tax; you pay it on your piece. Think of it as a shopping cart from one store — business income from one department, rental income from another, interest, dividends, capital gains — and each item keeps its character and lands on its own line of your return at its own rate. That is why the form has twenty boxes instead of one.
The K-1 shows your share of the entity’s income, not your share of its cash. A $40,000 K-1 with a $12,000 distribution means $40,000 of income; the distribution itself is tax-free up to your basis. A loss on a K-1 is deductible only after it clears basis, at-risk and passive limits, in that order. Partnerships and S corporations are due March 15 and often extend to September, so we extend your return when a K-1 is expected rather than file and amend.
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The map for each of the three K-1s: Parts I and II and the capital account, then every box of the 1065, 1120-S and 1041 versions and the form or schedule it feeds — Schedule E’s passive and nonpassive columns, Schedule D, Form 4797, the §179 and charitable codes, distributions and Form 7203, Section 199A statements, and the trust K-1’s final-year deductions and carryovers — with two worked examples of a loss through the three limits.
The three K-1s look alike and are read differently. The partnership K-1 has guaranteed payments and a self-employment box and counts your share of the partnership’s debt toward basis; the S corporation K-1 has none of those, because the owner was paid on a W-2 and only loans you made yourself count; the trust K-1 reports only the income carried out to you by distributions and keeps losses inside the trust until its final year.
The page walks each box to its line: ordinary income to Schedule E page 2 in the column that matches your participation, capital gains to Schedule D, §1231 to Form 4797, distributions to your basis record rather than to income, the 199A statement to Form 8995, and a trust’s final-year excess deductions and capital loss carryovers to the lines where they are finally deductible.
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The taxpayer number for people who cannot get a Social Security number: who needs one, nonresident versus resident status in brief, the Form W-7 package and the documents, why the first return is mailed to Austin instead of e-filed, the 7-to-11-week wait, what a Certifying Acceptance Agent can do that we cannot (keep your passport out of the mail), expiration and renewal, and which credits an ITIN opens.
An ITIN is a nine-digit IRS number for anyone who must appear on a federal return and is not eligible for a Social Security number: a nonresident with U.S. income, a resident alien by the day count without work authorization, the spouse or dependent of a citizen. The application is Form W-7, filed with the first return and original identity documents, on paper, to the IRS in Austin. We prepare the return; the number comes back in seven to eleven weeks; every year after that is e-filed.
The step worth paying for is the documents. A Certifying Acceptance Agent — a preparer with IRS forensic-document training and an agreement with the Service — can examine your passport, certify it, and hand it back, so the original never goes in the mail; an ordinary preparer like us cannot. The Denver IRS office can do the same by appointment, for free, if you can get one. The page also covers what an ITIN does not open: the earned income credit, and since 2025 the child tax credit for the taxpayer without an SSN.
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The money that arrives tax-free, rewritten for 2026 law: gifts and inheritances, GoFundMe, child support, the home sale exclusion and the 14-day rental rule, employer health insurance, HSAs, dependent care and tuition help, the turkey and the gym, life insurance, veterans’ and workers’ compensation, injury damages, insolvency, disaster relief, Roth withdrawals, municipal bonds, scholarships, Trump accounts, and the new tips and overtime deductions — with the items that are gone marked as gone, and the planning moves that create tax-free money on purpose, starting with giving appreciated stock instead of cash.
Not every dollar that arrives is income. The page lists 59 kinds the IRS doesn’t tax, grouped by where the money comes from — family, your employer, your home and investments, government and insurance, school and the new law — each updated for 2026 and flagged where the rules changed since the Forbes list we used to hand out: moving reimbursements are taxable now, the home-mortgage forgiveness exclusion is gone, dependent care is $7,500, employer student-loan help is permanent, and tips, overtime and the senior amount are new.
The second half is the planning: give appreciated stock instead of cash (deduct the full value, nobody pays the gain), the qualified charitable distribution, filling the pre-tax accounts, holding winners and harvesting losers, letting the step-up do the work, the 14-day rental to your own business, paying for disability insurance yourself, and putting the kids on the payroll. Other pages on this site refer back here for the general rule.
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Every carryover on an individual return: the capital loss carryover and the $3,000 rule, net operating losses and the 80% limit, suspended rental losses on Form 8582, excess business losses, S corporation basis, §179 and home office, negative QBI, charitable gifts over the limit, investment interest, the AMT and foreign tax credits — how long each lasts, where it is tracked, and the long list of things that don’t carry at all.
A tax return is not a clean slate every January. A stock loss, a business that lost money, a rental that ran at a loss, a gift to charity larger than the law allows in one bite — the unused part rides into the next return, sometimes for five years, sometimes for ten, sometimes for life. The IRS doesn’t track any of it for you.
These are the most commonly lost deductions in tax practice, and they are lost one way: somebody changed preparers or software, and the number that should have moved from last year’s return to this one never made the trip. This page is the list — what carries, how long, which form holds it, and what to look for on last year’s return before this year’s is filed. It ends with what doesn’t carry: the standard deduction, medical, SALT over the cap, the 2026 tips and overtime deductions, and every personal credit.
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What each box on the consolidated 1099 means, covered and noncovered sales, the wash sale box, qualified dividends and capital gain distributions, Treasury and municipal interest, the 2026 capital gains rates, and the basis the broker doesn’t report.
The February envelope holds four forms: 1099-B for sales, 1099-DIV for dividends, 1099-INT for interest, and sometimes a 1099-OID. Every number was also sent to the IRS, which matches it to your return by computer.
The most valuable work on a 1099-B is basis on noncovered sales, shares bought before 2011 or inherited, where the broker reports proceeds only; a sale with no basis on the return is taxed as all gain. Box 1g wash sales and box 2a capital gain distributions from a fund that lost money surprise people every year.
For 2026, long-term gains and qualified dividends are taxed at 0% up to $49,450 single / $98,900 joint and 15% up to $545,500 / $613,700. Colorado exempts Treasury interest (box 3) and adds back other states’ municipal interest.
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The permanent $750,000 limit and the grandfathered $1 million, what a refinance keeps, why cash-out interest is deductible only if the money improved the home, points on a purchase vs. a refinance, and mortgage insurance premiums deductible again for 2026.
Mortgage interest is deductible, if you itemize, on up to $750,000 of debt used to buy, build or improve your home ($1,000,000 for loans from before December 16, 2017). A refinance keeps that status for the old balance; any increase is traced to what you spent it on.
Cash-out used for a kitchen or an addition is acquisition debt. Cash-out used for cars, cards or college is not, even though the loan is secured by the house. Points on a purchase are deducted now; points on a refinance are spread over the loan, with the leftover deductible when the loan is paid off.
Mortgage insurance premiums (PMI, FHA, VA and USDA fees) are deductible again starting with 2026 returns, permanently, phasing out between $100,000 and $110,000 of adjusted gross income. With a $32,200 standard deduction, the first question is whether you itemize at all.
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When the mortgage is bigger than $750,000 ($1,000,000 for loans from before December 16, 2017), only a fraction of the interest is deductible on Schedule A: the limit divided by the average balance. Which balance counts, the IRS worksheet line by line, worked examples, and a calculator that does the arithmetic.
The lender reports every dollar of interest on Form 1098, but the deduction is capped at the interest on $750,000 of acquisition debt for loans taken out after December 15, 2017, and $1,000,000 for older loans. Over the cap, the deduction is a proportion: $750,000 divided by the average balance for the year, times the interest paid. A $1.46 million loan deducts about 51% of its interest.
The balance that counts is the average for the year, not the January 1 figure in box 2 of the 1098. The IRS allows three ways to compute it, and the calculator on the page accepts any of them and prints the Publication 936 worksheet. The limit is combined for a main home and one second home, halved for married filing separately, and per person for unmarried co-owners.
What to do about it: pay the loan down to the limit before paying anything else down, keep a pre-2018 loan’s $1,000,000 limit by not refinancing it into a bigger one, and keep non-house borrowing off the house.
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An employee for income tax and self-employed for Social Security; the housing allowance exclusion and its three limits; why the allowance is still subject to SE tax; the Form 4361 exemption, its deadline and its cost at 65; no withholding and the voluntary-withholding fix; the Deason allocation; honoraria, love offerings, and the retired minister’s allowance.
A minister serving a congregation gets a W-2 with no FICA and pays self-employment tax on salary plus housing allowance through Schedule SE, with nothing withheld unless the minister asks.
The housing allowance must be designated in advance, in writing, and is excluded only up to the lowest of the designation, actual housing costs, and fair rental value. Mortgage interest and taxes paid with it are still deductible.
Form 4361 is available only for conscientious or religious opposition to public insurance, must be filed by the second year, and is permanent. Written by an ordained minister who prepares these returns.
What to bring: pay stubs or records showing tips and overtime, and your loan statement and vehicle VIN. Married couples generally must file jointly to claim the tip and overtime deductions.
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If you buy coverage through Connect for Health Colorado, the rules changed for 2026, and the cap that limited paybacks is gone.
If you get health insurance through Connect for Health Colorado and receive help paying the premium, that help is an advance on a tax credit. When you file, the credit is recalculated on Form 8962 using your actual income for the year. If you earned more than you estimated, you pay back the difference.
What changed for 2026:
- No more repayment cap. Until now, most people’s paybacks were capped at a few thousand dollars at most. Starting with 2026 returns, there’s no cap: you repay the full excess.
- The income cliff is back. The enhanced subsidies of recent years expired at the end of 2025. If your household income ends up above 400% of the federal poverty level, you qualify for no credit at all and repay everything you received.
How to protect yourself:
- Report income changes to Connect for Health Colorado as they happen: a raise, a new job, a spouse going back to work, a large IRA withdrawal, or selling a rental.
- If a job offers you affordable coverage, you generally aren’t eligible for the credit anymore.
- File Form 8962 even if you wouldn’t otherwise need to file. Skipping it can cost you the credit in future years.
- Bring your Form 1095-A. We can’t finish your return without it.
Not sure where your income will land? Call us in the fall, before the year ends, and we’ll estimate it. (See also The Box 2 Bermuda Triangle.)
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The 2026 deduction for people who don’t itemize, the new 0.5% floor, the $250 receipt rule, donated goods and Form 8283, appreciated stock, volunteer mileage, and giving straight from your IRA after 70½.
- Non-itemizers: from 2026, up to $1,000 of cash gifts ($2,000 joint) on top of the standard deduction. Not gifts to donor-advised funds, and not donated goods.
- Itemizers: from 2026, the first 0.5% of AGI in gifts isn’t deductible.
- Receipts: every gift needs a bank record or receipt. Any single gift of $250 or more needs a written acknowledgment from the charity, in hand by the time you file.
- Noncash gifts: over $500 for the year needs Form 8283; over $5,000 for an item needs a qualified appraisal. Volunteer driving is 14 cents a mile.
- Best ways to give: appreciated stock (no capital gains tax), and qualified charitable distributions from an IRA after 70½, which stay out of your income entirely.
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All winnings are taxable, form or no form. The new 2026 W-2G thresholds, why losses only help if you itemize, the new 90% limit on losses, and how a good year can raise your Medicare premiums.
Every dollar of gambling winnings is taxable, from casinos, sportsbook apps, lotteries, poker and raffles, whether or not you get a W-2G. For 2026 the W-2G threshold rose to $2,000 for slots, bingo, keno and long-odds bets.
Losses are deductible only if you itemize, and only up to your winnings. Starting in 2026, only 90% of losses count: win $20,000 and lose $20,000, and you owe tax on $2,000. A bill to restore the full deduction is pending.
Because winnings raise your AGI, a big year can make more of your Social Security taxable and raise your Medicare premiums two years later. Keep a log and download your casino and app win/loss statements.
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Credit card settlements, Form 1099-C, foreclosures and short sales, and student loan forgiveness, plus the insolvency exclusion most people miss. Two changes for 2026 affect homeowners and student loan borrowers.
When a lender forgives debt, the forgiven amount is generally taxable income. Settle a $10,000 card balance for $4,000 and you may owe tax on $6,000.
- Insolvency: if you owed more than everything you owned just before the debt was canceled, you exclude the forgiven debt up to that shortfall. It’s claimed on Form 982, and many people who settle debts qualify.
- Bankruptcy: debt discharged in bankruptcy is never taxable.
- Your home: the exclusion for forgiven mortgage debt on a main home ended with 2025. A 2026 short sale or foreclosure can create taxable income.
- Student loans: income-driven repayment forgiveness is taxable again from 2026. Public Service Loan Forgiveness and death or disability discharges remain tax-free.
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The yes-or-no crypto question at the top of Form 1040: what counts as a digital asset, when you must answer yes, when no is correct, and the new Form 1099-DA.
Every Form 1040 asks, right under your name: did you receive a digital asset as a reward, award or payment, or sell, exchange or otherwise dispose of one? Everyone has to answer, crypto owner or not, and you sign it under penalty of perjury.
Digital assets include cryptocurrency like Bitcoin and Ether, stablecoins, and NFTs.
- Answer yes if you sold crypto for dollars, traded one coin for another, paid for something with crypto, sold an NFT, or received crypto as pay, staking or mining rewards, or an airdrop.
- Answer no if you only bought crypto with dollars and held it, or moved it between your own wallets or accounts.
Form 1099-DA. Starting with 2025 sales, custodial exchanges like Coinbase report your gross proceeds to the IRS. Cost basis is reported only for assets bought in 2026 or later, so for older holdings the IRS sees the sale price and not what you paid. Keep your own purchase records, or you could be taxed on the full sale price. Trades on decentralized exchanges and self-custody wallets still have to be reported, with or without a form.
Each sale or trade goes on Form 8949 and Schedule D as a capital gain or loss. Crypto received as income is taxed at its value when you got it.
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Why the U.S. taxes you wherever you live, what the $132,900 exclusion covers and what it does not, the three things you have to show, the housing exclusion, and the stacking rule that makes the rest of your income cost more than you expect.
Written for the client who keeps a house in Colorado and works in Qatar, Germany or Mexico. The page covers what counts as foreign earned income, the tax-home and U.S.-abode rules that disqualify rotational workers, the bona fide residence and 330-day tests, the foreign housing exclusion, a worked example of the 2006 stacking rule, when the foreign tax credit beats the exclusion and the five-year rule for switching, self-employment tax, the IRA and credit costs and risks, FBAR and Form 8938, and Colorado residency.
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What counts as expatriating, why a green card that expired in a drawer is still a green card, the three tests that decide whether anyone owes the tax, the pretend sale of everything you own, and the 40% that follows your family.
Section 877A treats the day before you expatriate as the day you sold everything. The page covers the expatriation date for citizens and for long-term green-card holders, the $2 million, $211,000 and five-year-certification tests that make someone a covered expatriate, the $910,000 exemption and a worked example, IRAs and pensions, Form 8854 and the split-year return, the section 2801 tax on gifts and inheritances and the new Form 708, life as a nonresident afterward, the relief procedures for accidental Americans, and why the five years before matter more than the net worth. We refer the exit tax itself to counsel.
Retirement
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Who can contribute, who can convert, the 2025 and 2026 limits and deadlines, how the backdoor Roth works, the pro-rata rule, and how to fix an excess contribution.
Roth IRA contributions aren’t deductible, but qualified withdrawals, including all the growth, are tax-free, and there are no required distributions during your lifetime. The limit is $7,000 for 2025 and $7,500 for 2026, plus $1,000 ($1,100 in 2026) at age 50 or older.
The ability to contribute phases out at higher incomes: for 2026, between $153,000 and $168,000 for single filers and between $242,000 and $252,000 for married couples filing jointly. Anyone can convert a traditional IRA to a Roth regardless of income; the converted amount is taxed in the year of conversion. That’s how the “backdoor Roth” works.
Watch out for the pro-rata rule: if you have other pre-tax IRA money, part of every conversion is taxable.
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How an HSA works, the 2026 limits, and the HSA deduction we find missing on self-prepared returns every tax season.
An HSA is the only account that’s tax-free going in, tax-free while it grows, and tax-free coming out for medical expenses. For 2026 you can contribute up to $4,400 with self-only coverage or $8,750 with family coverage, plus $1,000 if you’re 55 or older.
Contributions made through payroll are already left out of your W-2 wages. Contributions you make on your own are only deductible if you claim them on your return, and that’s the deduction self-prepared returns miss most often.
Check last year’s return: if you put money into your HSA yourself and Schedule 1, line 13 is blank, call us at 303-734-1040.
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Workplace plans, traditional IRAs, and the Saver’s Credit: contribution limits, catch-up contributions, and how each account is taxed going in and coming out.
For 2026 you can put up to $24,500 into a 401(k), 403(b), or most 457 plans, plus $8,000 more at age 50 or older (ages 60 to 63 get $11,250). The IRA limit is $7,500, plus $1,100 at 50 or older.
Traditional contributions reduce your taxable income now, and withdrawals are taxed later. Roth contributions are taxed now and come out tax-free. If you have a workplace plan, your traditional IRA deduction phases out at higher incomes.
Low- and moderate-income savers can also claim the Saver’s Credit, worth up to $1,000 ($2,000 joint), for income up to $40,250 single or $80,500 joint in 2026.
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A self-employed person is both employee and employer, and a solo 401(k) lets both contribute: $24,500 as the employee (more at 50 and at 60–63) plus 20% of net earnings or 25% of wages as the employer, up to $72,000 for 2026. Who qualifies, the self-employed arithmetic, Roth and loans, the Form 5500-EZ rule, deadlines, the SEP and SIMPLE comparison, and a calculator.
Anyone with self-employment income and no employees other than a spouse can have one: a Schedule C business, an LLC, a partnership of spouses, or the owner of an S corporation. On a $120,000 Schedule C at age 45 the maximum is $46,804 — a SEP on the same income allows $22,304, because the SEP has no employee deferral.
The employer piece is 25% of W-2 wages, or 20% of profit after half the self-employment tax for the unincorporated; the deferral can be Roth; loans and after-tax contributions depend on the plan document. The plan can be adopted as late as the extended due date for the employer contribution, but an S corporation owner’s deferral must run through payroll by December 31. Nothing is filed until plan assets pass $250,000; then Form 5500-EZ every July 31.
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How much of your Social Security is taxable, the required minimum distribution rules, and giving to charity straight from your IRA.
Social Security. Up to 85% of your benefits can be taxable, depending on your “provisional income”: your other income plus half your benefits. Below $25,000 (single) or $32,000 (joint), none of it is taxed. These thresholds have never been adjusted for inflation, so more retirees cross them every year. You can have federal tax withheld from benefits by filing Form W-4V with Social Security.
Required minimum distributions (RMDs). Starting at age 73 (75 if you were born in 1960 or later), you must take a minimum amount out of traditional IRAs and 401(k)s each year. Missing one brings a 25% penalty on the amount you should have taken, reduced to 10% if you fix it promptly. You can delay your first RMD until April 1 of the following year, but then you take two in one year. Roth IRAs have no RMDs while the owner is alive.
Giving to charity from your IRA. If you’re 70½ or older, a qualified charitable distribution sends money directly from your IRA to a charity, up to $111,000 for 2026. It isn’t taxed, it counts toward your RMD, and it works even if you don’t itemize. For many retirees it’s the best way to give. The money has to go straight from the IRA to the charity; if the check comes to you first, it doesn’t qualify.
Don’t miss: the new $6,000 deduction for people 65 and older. (See New for 2025–2028.)
Colorado lets people 65 and older subtract all federally taxed Social Security, and many people 55 to 64 can too. There’s also a separate subtraction for pension and IRA income.
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When a husband or wife dies, the survivor starts filing single on nearly the same income. Higher brackets, more taxable Social Security, Medicare surcharges sooner, and what couples can do about it while they still file jointly.
A surviving spouse generally files a joint return for the year of the death, then as a single filer from the next year on. The larger Social Security check, a survivor pension, and the IRAs keep coming, but the tax brackets, the standard deduction, and several income thresholds are roughly cut in half.
In our example on the page, a retired couple’s income drops 20% after a death, and the survivor’s federal tax goes up almost 50%. The same squeeze hits taxable Social Security, the new $6,000 senior deduction, Medicare’s IRMAA surcharge (it starts at $109,000 single versus $218,000 joint), and the 3.8% investment income tax.
Most of the planning works best while both spouses are living: Roth conversions at joint rates, charitable gifts from IRAs, timing capital gains, pension survivor options, and up-to-date beneficiaries. The page also has the questions we suggest couples talk through together, and a checklist for anyone whose spouse has died this year: what to consider before December 31. The rules are the same for widowers.
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For anyone drawing a benefit, and for anyone about to. The formula has not changed in decades, and that is the problem: each year’s cost-of-living increase pushes a few more retirees across lines drawn in 1983 and 1993.
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At 73 the IRS starts telling you how much to take out of your IRA. If you give to charity anyway, there is a way to do it that keeps the money off your return entirely, and for most retirees who give, it is the single best tax move available.
A traditional IRA is a deal with the government: no tax going in, full tax coming out. The required minimum distribution, or RMD, is how the government makes sure “coming out” eventually happens.
Most retirees’ planning room is right here, in how the RMD, Social Security and charitable giving interact, and the interaction is worth more than any of the three alone.
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For anyone on Medicare, or within two years of it, whose income is anywhere near $109,000 single or $218,000 joint. One dollar over a line costs a year of higher premiums, for each spouse, and the bill arrives two years after the income that caused it.
Most tax breaks come with an income limit, and the limit is often not what people expect. Cross it and the credit shrinks, the deduction disappears, or a surcharge appears.
The IRS calls it a phase-out. Medicare has one too, and it is the one retirees feel most, because it arrives as a bigger deduction from the Social Security check rather than a line on the tax return, and because it arrives two years late.
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For retirees whose pension, IRA and Social Security withholding no longer adds up to the tax, and for anyone who got a penalty letter last year and does not know why. Two tests excuse the penalty entirely, and one of them is a number you already know in January.
The tax system is pay-as-you-go. Tax is supposed to arrive during the year, through withholding or quarterly estimated payments, not in one check the following April.
Pay too little as you go and there is a charge for the delay, figured like interest on the amount you should have paid each quarter and did not. That is the underpayment penalty. Working people rarely see it, because an employer withholds from every paycheck. Retirees see it all the time, because a pension, Social Security and an IRA are three payers that never talk to each other.
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Taking money from a 401(k) or IRA before 59½: the income tax plus the 10% penalty, the full list of exceptions including the SECURE 2.0 additions, the 55 rule that a rollover destroys, Roth ordering, and Form 5329.
A withdrawal before 59½ is ordinary income plus a 10% additional tax, and the 20% the plan withholds rarely covers both. The exceptions remove the 10%; none removes the income tax.
The exception most often lost: leaving a job in or after the year you turn 55 makes that employer’s 401(k) penalty-free, but only while the money stays in the plan. Rolling it to an IRA the week after you leave locks it up until 59½. IRAs have their own exceptions, for college, a first home and health insurance while unemployed, that plans don’t.
Roth IRA contributions come back at any age for any reason, tax- and penalty-free, under the ordering rules. Any exception must be claimed on Form 5329; the plan reports code 1 on nearly every early withdrawal, and software pays penalties that were never owed.
Real estate
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What counts as rental income, what you can deduct, repairs versus improvements, why depreciation is not optional, the passive loss rules and the $25,000 allowance, the real estate professional exception, and what happens to the losses you can’t use.
A long-term rental goes on Schedule E: rent in, expenses out, and depreciation of the building over 27½ years. Depreciation is the paper loss landlords count on — and it is mandatory, since the IRS taxes its recapture at sale whether you took it or not. Repairs are deducted now; improvements are depreciated, with a $2,500-per-item safe harbor for small purchases. Interest follows the money: a home equity loan used to buy the rental is a rental expense.
Rental losses are passive and normally offset only passive income. The exception most owners use is the $25,000 allowance for active participants, which is full at $100,000 of income and gone at $150,000 — figures never adjusted since 1986. Above $150,000, no rental loss is deductible against wages at all, however real the numbers. Real estate professionals (750 hours, more than half their working time, with records kept as they go) are outside the passive rules entirely.
Losses you can’t use are suspended, not lost: they carry forward on Form 8582 and are released in full when the property is sold. That form is the one most often dropped when a taxpayer changes preparers, and the suspended losses quietly vanish with it.
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How a like-kind exchange lets you defer tax when you sell rental or investment real estate, the 45-day and 180-day deadlines, what counts as like-kind property, and why you need a qualified intermediary.
A 1031 exchange lets you sell rental or investment real estate and put the proceeds into another investment property without paying tax on the gain now. The gain isn't forgiven. It carries over into the new property and is taxed when you eventually sell without exchanging.
The rules are strict. You have 45 days after the sale to identify replacement property in writing and 180 days to close on it. The sale money has to go through a qualified intermediary, never your own account. Since 2018, only real estate qualifies; your home and property held for resale don't.
To defer all of the tax, buy replacement property of equal or greater value and replace the debt you paid off. Cash you keep, or debt that isn't replaced, is taxable “boot.”
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The two-out-of-five-year rule, what can reduce the exclusion, and the special five-year rule for a home you acquired in a 1031 exchange. Now with a partial-exclusion calculator for a job move, health or an unforeseen event, and a surviving-spouse calculator for the stepped-up basis and the two-year $500,000 window.
If you owned your main home and lived in it for at least two of the five years before you sell, you can exclude up to $250,000 of gain, or $500,000 for a married couple filing jointly. There’s no five-year ownership requirement for an ordinary purchase.
Depreciation from a home office or rental use, and years the home was a rental before you moved in, can make part of the gain taxable.
If you acquired the home in a 1031 exchange, there’s an extra rule: sell within five years of the exchange and you get no exclusion at all, even if you meet the two-year tests.
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How the $250,000 / $500,000 home-sale exclusion works, and how converting a long-held home to a rental can let you exclude part of the gain and defer the rest.
If you’ve owned and lived in your home for at least two of the last five years, you can exclude up to $250,000 of gain from tax, or $500,000 for a married couple filing jointly. Long-time owners in the Denver area often have more gain than that.
One option is to convert the home to a rental, hold it for a period as a rental, then sell it through a 1031 exchange. When done within the time limits, you can exclude up to $250,000 / $500,000 under the home-sale rules and defer the remaining gain into a replacement rental.
Timing matters. You still need two years of residence in the five years before the sale, so the sale generally has to happen within three years after you move out.
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Capital gains, depreciation recapture, and the extra ordinary tax a sale can trigger, with worked examples of how we run a before-and-after tax impact analysis.
The tax on selling a rental is more than one capital gains rate. The gain is split into pieces: depreciation you’ve claimed (or could have claimed) is taxed at up to 25%, the rest of the gain at 0%, 15%, or 20%, and higher-income sellers may owe the 3.8% net investment income tax. Colorado taxes the gain as ordinary income, and a large gain can push your other income into a higher bracket.
The only reliable way to know the real cost is to prepare your return twice, once without the sale and once with it, and compare. We’ve done this for clients where the sale added $19,000 in tax and others where it added more than $60,000.
Once you see the number, you can decide whether to sell, hold, or use a 1031 exchange.
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How the IRS treats a second home you use yourself, rent out, or both: the 14-day rule, splitting expenses between personal and rental use, and mortgage interest.
How a second home is taxed depends on how many days you rent it and how many days you use it yourself.
Rent it for 14 days or fewer during the year and the rent is tax-free; you don’t report it. Rent it more than that and the income is taxable, and your expenses have to be split between rental and personal days. If your personal use is more than 14 days, or more than 10% of the days it’s rented, rental deductions can’t exceed rental income.
Mortgage interest on a second home you use personally can be an itemized deduction, within the $750,000 total mortgage limit. When you sell, the home-sale exclusion generally doesn’t apply unless it was your main home.
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The 14-day rule, allocating a rented room, the seven-day rule that makes short-term rental losses nonpassive, Schedule E vs. Schedule C, mixed-use limits, basis when you convert your home to a rental, and Colorado lodging tax and licensing.
Rent your home 14 days or fewer and the income isn’t reported. Rent a room all year and you have a Schedule E with a square-footage share of the house’s expenses and depreciation. Move out and rent the whole house and the depreciable basis is the lower of your cost or the value on the day you convert.
An Airbnb with an average stay of seven days or less is not a rental activity for the passive-loss rules; if you do the work yourself, a loss offsets your wages. Hotel-type services (meals, daily cleaning) move it to Schedule C and self-employment tax.
Colorado adds sales and lodging tax on stays under 30 days, which the platforms mostly collect, and most metro cities require a short-term rental license. Renting to family below market makes every day a personal-use day.
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Carry the buyer’s note and the gain is taxed as the principal comes in. The gross profit percentage, what gets taxed up front anyway, the related-party two-year rule, the minimum interest rate, and what happens if the buyer stops paying.
Seller financing on a farm, a rental sold to the tenant, a business sold to the manager: each is an installment sale under section 453. The page works a Castle Rock rental sold on a ten-year note, explains why depreciation recapture, inventory and interest are not deferred, covers the mortgage-over-basis rule, the two-year resale rule for sales to relatives, imputed interest at the applicable federal rate, the pledge rule and the $5 million interest charge, selling a home on a note, repossession, electing out, and the Colorado side for a seller who moves away before the note is paid.
Family, education & estate
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The American Opportunity and Lifetime Learning credits: who qualifies, which expenses count, the income limits, and how to coordinate the credits with 529 plan withdrawals and scholarships.
Two credits help with college costs. The American Opportunity Tax Credit is worth up to $2,500 per student per year for the first four years of college, and up to $1,000 of it is refundable. The Lifetime Learning Credit is worth up to $2,000 per return and covers graduate school, job-skills courses, and years beyond the first four.
Both phase out for incomes between $80,000 and $90,000 ($160,000 to $180,000 married filing jointly). Starting in 2026, the taxpayer and student need a Social Security number.
Coordination matters: the same expense can’t count for both a credit and a tax-free 529 withdrawal or scholarship. Planning which dollars pay which bills can increase the total benefit.
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The annual gift exclusion, when a gift tax return (Form 709) is required, the lifetime exemption, and how the tax basis of inherited property is determined.
Very few families owe federal gift or estate tax. For 2026 you can give up to $19,000 per person to as many people as you like without filing anything, and the lifetime exemption is $15 million per person ($30 million for a married couple). The 2025 tax law made the higher exemption permanent and indexed it for inflation.
Gifts above $19,000 to one person in a year require a gift tax return (Form 709), but usually no tax. The excess just uses up part of your lifetime exemption.
Income tax is often the bigger issue. Property you give keeps your original basis, while property someone inherits generally gets a basis equal to its value at death. That difference can matter more than the gift tax. Colorado has no estate or inheritance tax.
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Day care, preschool, after-school programs, and summer day camp can earn a credit worth up to $3,000 starting in 2026. Many families miss it.
One of our clients told us they had no idea summer camp and child care could reduce their taxes. That’s what this credit is for. If you pay for care so you and your spouse can work or look for work, you may qualify.
What counts: day care, preschool, before- and after-school programs, nannies and babysitters, and summer day camp, for children under 13 or for a spouse or dependent who can’t care for themselves.
What doesn’t: overnight camp, kindergarten and school tuition, and lessons such as tutoring or sports.How much. You can count up to $3,000 of expenses for one child or $6,000 for two or more. Starting with 2026 returns, the 2025 tax law raised the credit to as much as 50% of those expenses for lower-income families, so the credit can reach $1,500 or $3,000. Most families get 35% to 20%, depending on income. The credit reduces your tax but isn’t refundable.
Two things to watch:
- Dependent care FSA. If your employer offers one, the 2026 limit rises to $7,500. You can’t use the same dollars for both the FSA and the credit, so it’s worth figuring which works better.
- Records. You’ll need each provider’s name, address, and tax ID number, so ask for them when you pay, not in April. Paying a grandparent counts, as long as they aren’t your dependent.
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Filing status by December 31, alimony that is no longer deductible for post-2018 agreements, which parent claims the children and what Form 8332 does and doesn’t transfer, splitting the house and the 401(k) without tax, and the joint returns you still owe on.
Your filing status is set by whether the decree is final on December 31. Married but living apart since June can still file head of household under the considered-unmarried rules if a child lives with you.
For agreements signed after 2018, alimony is neither deductible nor income, permanently. Child support never was. The custodial parent, by nights, claims the child; Form 8332 hands over the child tax credit but never head of household, the earned income credit or the dependent care credit.
Property moves between spouses without tax but with the old basis, so a $500,000 house with $400,000 of gain is not the same as a $500,000 bank account. A 401(k) is split only by QDRO; a QDRO payment from a plan can be taken in cash without the 10% penalty, an IRA split can’t.
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Date-of-death value as the new basis, the half step-up when a spouse dies and why to sell after rather than before, joint accounts with a child, the Colorado beneficiary deed, what gets no step-up (IRAs, annuities, savings bonds, gifts), trusts, and selling the inherited home at a loss.
Inherited property takes a basis equal to its value on the date of death, and the gain that built up during the decedent’s life is never taxed. The holding period is automatically long-term.
When a spouse dies in Colorado, the decedent’s half of jointly owned property steps up and the survivor’s half keeps the old basis; tell the broker in writing. A house deeded to the children during life carries the parent’s old basis forever; a beneficiary deed gives a full step-up and avoids probate for a few hundred dollars.
No step-up for IRAs, 401(k)s, annuities or savings bonds, which are taxed to whoever takes the money. An inherited house sold soon after death, with commissions, often produces a deductible loss. Colorado has no estate or inheritance tax.
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Why a revocable trust changes nothing, what happens the day it becomes irrevocable, the trust brackets that reach 37% at $16,000, how distributions carry income to beneficiaries on a K-1, capital gains stuck in the trust, the 65-day rule, and Colorado’s fiduciary return.
A revocable living trust is ignored for income tax while its creator is alive. When it becomes irrevocable, it gets an EIN, files Form 1041, and pays tax at brackets that reach 37% at $16,000 of income.
Income the trust pays out is deducted by the trust and taxed to the beneficiary at the beneficiary’s rates; income it keeps is taxed at the trust’s. The K-1 shows the income portion only, which is why an $80,000 check comes with a $4,000 K-1. Capital gains usually stay in the trust unless the document, state law or an in-kind distribution gets them out.
A distribution in the first 65 days of the year can be elected as a prior-year distribution, the single most valuable line on the trust return. Colorado taxes resident trusts on the fiduciary return, DR 0105, at 4.40%.
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What probate is, what skips it and why the will has no say over those assets, dying without a will, choosing an executor, the living trust and pour-over will, and the powers of attorney — with the Colorado specifics.
Beneficiary designations, joint titles, beneficiary deeds and living trusts all pass outside probate and override the will. Colorado’s informal probate, small-estate affidavit and beneficiary deed; intestacy order; holographic wills and the personal property memorandum; the unfunded trust; durable and medical powers of attorney and the living will; and where the basis and Form 706 questions come in.
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Joint titles that override the will, life insurance owned by the wrong person, a stale will, no cash for the bills, the wrong executor, everything to the spouse, the unfunded trust, no records, no plan.
Ten mistakes in the order a tax preparer meets them, each with what it costs — usually basis, probate fees, delay and arguments rather than estate tax — and the plain fix: beneficiary deeds and POD designations instead of adding a child to the title, portability on Form 706 when everything goes to the spouse, who should own the life insurance, funding the trust, and keeping the basis records.
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The $19,000 annual exclusion and $15 million exemption, the gifts people don’t recognize (deeds, forgiven loans, paid bills), tuition and medical exceptions, gift splitting and the 529 five-year election, the statute that never runs on an unreported gift, adequate disclosure, and the carryover-basis cost of giving.
Almost no one pays gift tax; many people are required to file the return. Any gift over $19,000 to one person requires Form 709, with no tax due, because the return is how the IRS tracks the $15 million exemption.
A gift that was required to be reported and wasn’t has no statute of limitations: it can be revalued and assessed when the estate is examined decades later. A late return with an appraisal costs nothing and closes it.
With the exemption at $15 million, the step-up at death is usually worth more than a lifetime gift of appreciated property. What to bring, and the preparer’s notes.
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Why there is a third transfer tax, who is a skip person, the three kinds of generation-skipping transfer, the gifts that are exempt, the $15 million GST exemption and how it is allocated on Form 709, the inclusion ratio, and the Crummey-trust trap that uses up exemption without anyone noticing.
The generation-skipping transfer tax is a flat 40% on top of gift or estate tax when property skips a generation — to a grandchild, or to anyone more than 37½ years younger. Almost nobody pays it, because every person has a $15 million exemption; many people waste some of it, because the exemption is allocated on gift tax returns most people never file.
Annual-exclusion gifts made outright to a grandchild are exempt. The same gift made to a trust for the grandchild usually is not, and a Crummey trust for grandchildren silently consumes exemption every year unless the return is filed and the allocation elected out.
Who is a skip person, the predeceased-parent rule, the three transfers, the inclusion ratio, and what to bring.
Missed it on a past return? Returns can generally be amended for three years.
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The tax filings after a death, the stepped-up basis on inherited property, and the 10-year rule for inherited IRAs.
Losing someone is hard enough without the paperwork. Here’s what usually needs to be done, and we can handle it for you.
The final return. A final Form 1040 is due by April 15 of the year after death, covering January 1 through the date of death. A surviving spouse can usually file jointly for that year. If the estate earns $600 or more of income, such as interest, dividends, or rent, while it’s being settled, it files its own return, Form 1041.
Inherited property. Property you inherit usually gets a “stepped-up” basis equal to its value on the date of death. If you sell soon afterward, there’s often little or no gain to tax. A surviving spouse who sells the home within two years of the death can generally still use the full $500,000 home-sale exclusion.
Inherited IRAs. This is where people make expensive mistakes.
- A spouse can roll the IRA into their own or keep it as an inherited IRA.
- Most other beneficiaries must empty the account by the end of the 10th year after the death. If the owner had already started RMDs, the beneficiary must also take annual withdrawals during those years, and missing one brings a penalty.
- Some beneficiaries get more time: minor children of the owner, disabled or chronically ill beneficiaries, and anyone not more than 10 years younger than the owner.
- Planning when to take the money over the 10 years can save a lot of tax, rather than taking it all at once or all in year 10.
Bring the death certificate, the last return filed, and any statements and 1099s. Related topics: Understanding the Widow’s Penalty; Gift and Estate Taxes; Capital Gains Tax.
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The $2,200 Child Tax Credit, the new Social Security number rules, and how to claim the $1,000 Trump account deposit for children born 2025 through 2028.
Child Tax Credit. For 2026 the credit is $2,200 for each child under 17, and it’s now adjusted for inflation each year. Part of it, up to $1,700 per child, is refundable for families who owe little tax. It phases out above $200,000 of income for single filers and $400,000 for joint filers. Older children and other dependents can qualify for a $500 credit.
New rule: the child needs a Social Security number, and so does at least one parent claiming the credit.
Trump accounts. These are new investment accounts for children under 18, created by the 2025 tax law.
- $1,000 from the government. Children who are U.S. citizens, born in 2025, 2026, 2027, or 2028, and have a Social Security number can receive a one-time $1,000 deposit. It isn’t automatic: a parent must elect it on Form 4547, filed with your tax return, or at trumpaccounts.gov.
- Contributions started July 4, 2026. Family and others can put in up to $5,000 a year. Employers can contribute up to $2,500 tax-free, within that $5,000.
- Investments are limited to low-cost U.S. stock index funds, and the money generally can’t be withdrawn until the child turns 18.
Our take: if your child qualifies, claim the $1,000; it’s free money. Before putting in more of your own money, compare it with a 529 college plan or, once your child has a job, a Roth IRA. Those may offer better tax treatment depending on your goals. We can file Form 4547 with your return.
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The qualifying child and qualifying relative tests, the tie-breakers when two people could claim the same child, divorced and separated parents and Form 8332, and common cases like college students and aging parents.
A qualifying child must meet five tests: relationship, age (under 19, under 24 if a full-time student, or any age if disabled), living with you more than half the year, not paying more than half of their own support, and not filing a joint return. There’s no income limit.
A qualifying relative, such as a parent you support, must have gross income under $5,300 for 2026 ($5,200 for 2025), not counting nontaxable Social Security, and you must pay more than half their support. A parent doesn’t have to live with you.
Divorced parents: the parent with more nights claims the child. Form 8332 can release the Child Tax Credit to the other parent, but head of household, the Earned Income Tax Credit and the child care credit stay with the custodial parent. A post-2008 divorce decree can’t substitute for the signed form.
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A teenager with a summer job files first, leaves one box unchecked, and the parents’ return is rejected. Why it happens, what it costs, how we fix it, and a worksheet for comparing who comes out ahead.
Every spring a handful of families call us with the same story: a son or daughter earned about $6,000 over the summer, filed their own return to get the withholding back, and answered no to “Can someone claim you as a dependent?” When the parents file, the IRS rejects their return because the child has already been claimed.
The question asks whether someone can claim you, not whether they have. A child who qualifies as a dependent must check the box, and checking it usually costs the child nothing — a dependent with wages still gets a standard deduction of earnings plus $450, so the summer-job refund is the same either way. Leaving it blank costs the parents the $2,200 Child Tax Credit, the $500 credit for an older child, or an education credit.
The fix is an amended return for the child and a paper-filed return for the parents. It takes months, but it gets resolved. The page includes a worksheet for the cases where there is a real choice — divorced parents, or high-income parents phased out of the American Opportunity Credit.
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When a child’s interest, dividends and capital gains are taxed at the parents’ rate, which children it applies to, the $2,700 line, and how to plan around it.
The kiddie tax keeps parents from shifting investments to their children to use the children’s low tax rate. For 2025 and 2026:
- The first $1,350 of a child’s unearned income is tax-free, and the next $1,350 is taxed at the child’s rate.
- Unearned income above $2,700 is taxed at the parents’ rate, on Form 8615.
- It applies to children under 19, and to full-time students under 24 whose earned income doesn’t cover more than half their support.
- Unearned income means interest, dividends, capital gains, taxable scholarship money, and distributions from an inherited IRA. Wages from a job are taxed at the child’s own rate.
The parents’ election. If the child has only interest and dividends, between $1,350 and $13,500, the parents can report it on their own return with Form 8814 instead. It saves a return, but it raises the parents’ AGI and often costs a little more.
Planning. Custodial accounts that throw off large dividends or capital gains are where the kiddie tax bites. Growth investments held for the long term, 529 plans, and a Roth IRA funded from the child’s own job avoid it. Children who inherit an IRA should plan withdrawals with this in mind. (See when a child must file.)
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When paying a nanny, caregiver or housekeeper makes you an employer: the $2,800 (2025) and $3,000 (2026) lines, Schedule H, Form W-2, who’s exempt, and why paying under the table backfires.
If you pay someone to work in or around your home and you control how and when the work is done, such as a nanny, housekeeper, caregiver or private nurse, that person is usually your household employee, not a contractor. A worker with their own business who serves many clients, like a cleaning company, generally isn’t.
- Social Security and Medicare: once you pay one household employee $2,800 or more in cash wages for 2025, or $3,000 for 2026, you owe 7.65% and must withhold another 7.65% from their pay, or pay it for them.
- Federal unemployment: if you pay household wages of $1,000 or more in any calendar quarter, you owe FUTA on the first $7,000 of each employee’s wages.
- Exempt: your spouse, your child under 21, your parent in most cases, and workers under 18 who are students or for whom household work isn’t their main job.
- Paperwork: get an employer ID number, give the employee a W-2 by January 31, and report everything on Schedule H with your Form 1040. You can raise your own withholding or estimated payments to cover it.
- Colorado: household employers may also owe Colorado unemployment insurance and FAMLI premiums. We’ll check what applies to you.
Why it pays to do it right: to claim the child care credit or use a dependent care FSA, you have to report the caregiver’s name and Social Security number. A nanny paid under the table gets no Social Security credit or unemployment protection, and you can owe back taxes and penalties later.
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What 529 plans can pay for in 2025 and 2026, including K–12, apprenticeships and Roth rollovers; Colorado’s 529 deduction; the student loan interest deduction; employer loan help; when forgiveness is taxable; and when education for your job is deductible and when it isn’t (the new-trade-or-business rule).
- 529 plans cover college costs including room and board, plus K–12 tuition ($10,000 a year for 2025, $20,000 from 2026), credential programs, up to $10,000 of student loan payments, and up to $35,000 rolled into the student’s Roth IRA.
- Colorado subtracts CollegeInvest contributions up to $26,200 per beneficiary single, $39,200 joint for 2026, and grandparents can take it.
- Student loan interest: up to $2,500 a year, phasing out at $85,000–$100,000 single and $175,000–$205,000 joint for 2026.
- Employers can pay $5,250 a year of your student loans tax-free, now permanently.
- Forgiveness: income-driven repayment forgiveness is taxable again from 2026; Public Service Loan Forgiveness isn’t.
Small business
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How the IRS decides whether a side activity is a business, why hobby income is taxable while hobby expenses generally aren’t deductible, and the factors that tip the balance.
If you sell crafts, raise horses, breed dogs, or do photography on the side, the IRS will want to know whether it’s a business or a hobby. The difference matters: business expenses are deductible, and a business loss can offset other income. Hobby income is fully taxable, and hobby expenses aren’t deductible at all. The 2025 tax law made that permanent.
The IRS looks at whether you run the activity like a business: separate records and accounts, time and expertise invested, changes made to improve profitability, and a realistic expectation of profit. An activity that shows a profit in three of five years is presumed to be a business (two of seven for horses).
A few years of losses isn’t fatal, but you should be able to show a real plan for making money.
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Companion to The Box 2 Bermuda Triangle
Lost at Sea: Self-Employed Without Books
If you work for yourself, nobody withholds anything and nobody tracks your expenses but you. Without good bookkeeping, you are almost certainly paying tax on money you never kept.
$250–$400What every $1,000 of business expense you forget to deduct can cost you in self-employment tax and income tax.The Bermuda Triangle is what happens when employers forget to withhold. When you’re self-employed, there’s no employer at all. No withholding, no payroll department, and no one keeping track of what you spent to earn the money. On top of income tax you owe self-employment tax, 15.3% for Social Security and Medicare, because you’re both the employee and the employer.
Here’s the part most people miss: the IRS taxes your profit, not your gross receipts, and the only thing standing between the two is your records. Mileage, tools, supplies, your phone, software, a home office, health insurance premiums, retirement contributions. Every expense you can’t document is an expense you pay tax on as if it were profit. A client who walks in with a shoebox and a guess almost always leaves money on the table. Forget $8,000 of legitimate expenses and you could hand the IRS $2,000 to $3,000 you didn’t owe.
And if the IRS ever asks, a deduction without records is a deduction you lose, with penalties and interest added.
Bookkeeping is everything. Separate bank account and card for the business. Every receipt saved. A mileage log kept as you go, not reconstructed in April. Books brought up to date every month. When my tax clients need accounting and bookkeeping services, I recommend Admin Concepts.
And don’t forget the taxes themselves. Since nothing is withheld, you’re expected to pay quarterly estimated tax in April, June, September, and January. Good books tell you what your profit is, and your profit tells you what to send. If you’re already behind, we can help with that too, including an installment agreement filed with your return.
Also known as: The Shoebox Shipwreck · Receipts Overboard · Nobody Withholds for You
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Who gets a 1099-K from a payment app or online marketplace, the $20,000 reporting threshold, and why the income has to be reported whether a form shows up or not.
Venmo, PayPal, Cash App, Etsy, eBay, and other payment apps and marketplaces send Form 1099-K to people who are paid through them for goods and services. The IRS gets a copy too. The 2025 tax law set the reporting threshold back at more than $20,000 in payments and more than 200 transactions in a year, after the IRS had been phasing in much lower thresholds.
Here’s the catch: the threshold only decides whether you get a form. It doesn’t decide whether the income is taxable. If you sell goods or services, all of it needs to be reported on your tax return, whether you made $500 or $50,000 and whether or not a 1099-K ever arrives.
A 1099-K also shows your gross payments: every dollar that came through, before fees, shipping, the cost of what you sold, and your other expenses. The tax is on your profit, and the only way to show your profit is good records. (See Lost at Sea: Self-Employed Without Books.)
Not everything on a 1099-K is income. Splitting a dinner bill, paying back a friend, or getting a gift isn’t taxable, and selling your own used couch or clothes for less than you paid isn’t a taxable gain. But if those payments show up on a 1099-K, they still have to be accounted for on your return so the IRS doesn’t treat them as income. Bring the form to us and we’ll sort out what’s taxable and what isn’t.
Also known as: A Message in a Bottle from PayPal · The Venmo Undertow · Side Hustle, Front Page
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The four ways a business can be taxed, side by side: who pays the tax, self-employment and payroll tax, losses, liability, cost, and which one fits your business. Plus where an LLC fits in.
A sole proprietorship (Schedule C) is the simplest and cheapest, and a business loss offsets your other income, but you pay 15.3% self-employment tax on all your profit. A partnership (Form 1065) is the most flexible: partners can split income and losses unevenly, and property moves in and out without tax, which is why real estate belongs in one.
An S corporation (Form 1120-S) limits Social Security and Medicare tax to a reasonable salary, but it costs more to run and has strict ownership rules. We generally don’t recommend one until net income is consistently above about $100,000. A C corporation (Form 1120) pays a flat 21% itself, but profits paid out as dividends are taxed again. It makes sense mainly for businesses that reinvest, raise outside money, or plan to sell.
An LLC isn’t a tax type at all. It’s a legal shield, and the IRS taxes it as one of the four.
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How an S corporation saves Social Security and Medicare tax, what it costs to run one, the reasonable salary rule, why we suggest waiting until your business nets about $100,000, the three steps from a Schedule C to an S election and the §351 transfer, and the first-year checklist: EFTPS, the quarterly 941s, the W-2, the March 15 return, and the Colorado payroll calendar.
An S corporation is a tax election, not a different kind of business. Its main benefit: instead of paying 15.3% self-employment tax on all your profit, you pay yourself a reasonable salary through payroll, and Social Security and Medicare apply only to that salary. The rest comes to you as a distribution without those taxes.
The savings come with costs: a separate corporate return (Form 1120-S, due March 15), payroll, monthly deposits, quarterly 941s, unemployment taxes, and Colorado FAMLI premiums. Figure roughly $2,000 to $3,000 a year. Here’s a rough look at savings before those costs:
Net business income Savings before added costs $60,000 About $1,300 $100,000 About $3,700 $150,000 About $7,400 That’s why we generally recommend an S corporation only once your Schedule C net income is consistently above about $100,000. Keep in mind that paying less into Social Security now means a smaller Social Security check later.
Converting is three steps for a sole proprietor — form the entity, get its own EIN and accounts, file Form 2553 within two months and 15 days — and one step for an existing LLC. The business’s assets move in tax-free under §351, and your basis starts at what you put in. The first year brings a new calendar: monthly payroll deposits through EFTPS, Form 941 each quarter, Form 940 and your W-2 in January, the 1120-S on March 15, and Colorado withholding, unemployment and FAMLI filings. The page has the full checklist.
Setting one up is a legal job too. Ownership, operating agreements, and buy-sell agreements done wrong can end the S election. We often refer clients to Tyler Murray of Murray & McCarthy Law in Denver for the formation, and we handle the tax side.
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The corporation that pays its own tax: the flat 21% rate, the second layer on dividends, a side-by-side with the S corporation, the four situations where a C corporation is the right choice, and why it is the wrong one for most small businesses.
A C corporation is a separate taxpayer. It files Form 1120 and pays a flat 21% on its profit; the owners pay tax again on dividends. That double layer is why most small businesses are pass-throughs instead — taxed once, on the owners’ returns, usually with the 20% QBI deduction.
The C corporation earns its place when profit stays in the business, when outside investors are coming, when the owner wants fully deductible fringe benefits, and above all when a sale is in the future: Section 1202 can exclude most or all of the gain on qualified small business stock, up to $15 million or more per shareholder, for a company that was a C corporation from the start.
Going in is easy; getting out is not. Converting a C corporation later is taxable or restricted, so the decision deserves thought before anything is filed. Colorado taxes corporations at the same 4.4% rate as individuals.
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The default for any business with two or more owners: Form 1065 and the K-1, the March 15 deadline and the per-partner penalty, why you pay tax on your share and not your draw, guaranteed payments, self-employment tax, the basis number every partner has to track, and when a partnership beats an S corporation.
Two people who form an LLC are a partnership for tax the day they open the bank account. The partnership files Form 1065 by March 15 but pays no tax; each partner gets a K-1 and pays tax on his or her share of the profit, whether or not any of it was paid out. The late-filing penalty is per partner, per month.
A working partner is paid a guaranteed payment, not a W-2 salary, so there is no withholding and estimates are required; the payment and the partner’s share of business income are subject to self-employment tax. Every partner has a basis that goes up with income and debt and down with losses and draws, and it decides whether a distribution is taxable, whether a loss is deductible, and what the gain is on the way out.
Partnerships win for real estate, unequal deals, and owners who can’t hold S corporation stock; S corporations win on self-employment tax for a profitable service business. Colorado taxes each partner’s share at 4.40% and offers an entity-level election.
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The qualified business income deduction, now permanent: 20% of Schedule C, partnership, S corporation and some rental income, the 2026 thresholds and widened phase-in, the specified service trades that lose it, the wage and property limit, the new $400 minimum, and what quietly reduces QBI.
Below $201,750 of taxable income (single) or $403,500 (joint), the deduction is 20% of qualified business income, limited to 20% of taxable income less capital gains. QBI is profit after the deductible half of self-employment tax, self-employed health insurance and retirement contributions.
Above the thresholds, through a $75,000 / $150,000 phase-in, health, law, accounting, consulting, financial services and similar businesses lose the deduction entirely; everyone else is limited to 50% of W-2 wages or 25% of wages plus 2.5% of property. An S corporation salary that costs payroll tax is also the wages that keep the deduction.
Rentals qualify with 250 hours of rental services under the IRS safe harbor, or on the facts. REIT dividends qualify with no tests at all. Starting in 2026, anyone with $1,000 of QBI from a business they work in gets at least $400.
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Doctors, lawyers, accountants, consultants, financial advisers and performers lose the QBI deduction above an income threshold. Who is on the list, who is not, and the 2025 and 2026 numbers.
The fields on the list and the ones expressly left off (engineering, architecture, real estate and insurance sales), the thresholds for 2025 and 2026, the wider phase-in range from the 2025 law, the 10% de minimis cliff, the self-rental trap for a professional who owns the office building, and what can honestly be done about it.
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Exclusive and regular use, the administrative-work door to principal place of business, why employees can’t take it, the $5-per-square-foot simplified method vs. Form 8829, the income limit, depreciation recapture at sale, and the accountable plan for S corporation owners.
The space must be used only for the business, regularly, and be your principal place of business, which includes a home office where you do the administrative work when you have no other fixed place for it. Employees can’t take the deduction; an employer can reimburse it tax-free.
The simplified method is $5 a square foot up to 300 square feet, with no depreciation and nothing to recapture. The regular method deducts the office’s share of interest, taxes, insurance, utilities and repairs on Form 8829, plus depreciation over 39 years, limited to the business’s income.
At sale, the home-sale exclusion still covers the whole house if the office is inside it; only the depreciation is taxed, at up to 25%. S corporation owners get the deduction through an accountable-plan reimbursement, not by renting the office to the corporation.
Tax Planning Strategies
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The series index: what counts as a strategy, the strategies that no longer work, when each decision happens in the year, and links to the nine pages by who you are.
There is no cure for income tax. This series sorts the legal, documented ways to pay less of it by who you are: families, college, homeowners, investors, the self-employed, people near retirement, retirees, the widowed and divorced, and higher earners.
Each strategy gives the 2026 figure, the condition that makes it hold up, and the full article. Each page ends with the costs and risks for the client and the cautions for the preparer for the preparer.
Start here if you don’t know which page is yours; most households belong to two.
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Every carryover on an individual return: the capital loss carryover and the $3,000 rule, net operating losses and the 80% limit, suspended rental losses on Form 8582, excess business losses, S corporation basis, §179 and home office, negative QBI, charitable gifts over the limit, investment interest, the AMT and foreign tax credits — how long each lasts, where it is tracked, and the long list of things that don’t carry at all.
A tax return is not a clean slate every January. A stock loss, a business that lost money, a rental that ran at a loss, a gift to charity larger than the law allows in one bite — the unused part rides into the next return, sometimes for five years, sometimes for ten, sometimes for life. The IRS doesn’t track any of it for you.
These are the most commonly lost deductions in tax practice, and they are lost one way: somebody changed preparers or software, and the number that should have moved from last year’s return to this one never made the trip. This page is the list — what carries, how long, which form holds it, and what to look for on last year’s return before this year’s is filed. It ends with what doesn’t carry: the standard deduction, medical, SALT over the cap, the 2026 tips and overtime deductions, and every personal credit.
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The child tax credit and the Trump account deposit, day camp and the $7,500 FSA, head of household, the earned income credit at middle incomes, Colorado’s family credits, a teenager on the payroll, the kiddie tax line, 529s with the Colorado deduction, adoption, and the W-4 that stops the April surprise.
Raising children is the most-subsidized activity in the tax code and the most-conditioned; families lose the credits by missing a condition, not by being ineligible.
Ten strategies with the 2026 figures: $2,200 per child, $7,500 of pre-tax day care, $24,150 standard deduction for a single parent, up to $8,231 of earned income credit, $16,100 tax-free to a working teenager, and the rest.
Costs and risks and cautions for the preparer for the phase-outs where one credit reduces another.
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The American Opportunity Credit four times, paying $4,000 of tuition from checking so the 529 and the credit both work, the Lifetime Learning Credit, 529 timing, grandparent 529s under the new FAFSA, allocating a scholarship to room and board, student loan interest and employer loan payments, and whose return the student goes on.
College is the one expense where the order of payments changes the tax: the same $30,000 can produce a $2,500 credit and tax-free 529 withdrawals, or neither.
Nine strategies, with the coordination rules self-prepared returns miss: the $4,000 carve-out, the scholarship allocation election, the December-January matching problem, and the student who filed first.
The grandparent 529 is no longer counted on the FAFSA, which changes who should own the account.
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The $250,000/$500,000 exclusion used more than once, the two-year window after a death and the three-year window after a move, keeping the deduction through a refinance, PMI deductible again, bunching to itemize, 14 days tax-free, converting to a rental without losing the exclusion, the §121/§1031 route for big gains, and Colorado’s senior property tax exemption.
The home is the most-favored asset in the code and the one where the timing rules decide the most money: a sale a month inside or outside a window is a $250,000 difference in exclusion.
Nine strategies for 2026, including the ones the standard deduction has made harder (bunching) and the one the 2025 act restored (mortgage insurance premiums).
Colorado’s senior homestead exemption, deferral and PTC rebate are not on the income tax return and are routinely never applied for.
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Move into the rental, live there two years, sell it as your home: legal, in the Code, and smaller than it looks. The nonqualified-use fraction that counts every post-2008 rental year against the exclusion, the depreciation that is recaptured at up to 25% no matter what, the five-year rule and the Rev. Proc. 2008-16 two-year safe harbor when the rental came from a 1031 exchange, suspended losses, a calculator, three worked examples, and our view of when anyone actually does this.
The $250,000 / $500,000 exclusion applies to a former rental once you have lived in it two of the last five years, and converting is not a taxable event. But two rules shrink the prize: depreciation taken since 1997 is taxed first at up to 25% and can never be excluded, and the rest of the gain is prorated by the share of your ownership that was rental use after 2008. A house rented ten years and lived in two excludes about a sixth of its gain; one rented three years and lived in three excludes half.
If the rental came from a 1031 exchange, three more rules apply: it must have been held for investment when exchanged, the IRS safe harbor wants two years of real tenants before you move in, and no exclusion is available until five years after the exchange. Our experience is that most landlords either exchange, which defers everything, or sell and pay, because living in the rental is rarely attractive; the conversion fits a narrow case, and holding until death, with the step-up, beats all of them.
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Harvesting gains at 0% below $98,900, harvesting losses without a wash, holding past a year, putting each asset in the right account, the net unrealized appreciation election on employer stock, ISOs and RSUs, donating shares instead of cash, qualified small business stock under the 2025 act, the 3.8% line, and never selling what will be stepped up.
Investment income is the most controllable income there is, because a gain is taxed only when you choose to sell and the rate depends on when.
Ten strategies; the first three cost nothing and work for anyone with a taxable account; the NUA and 83(b) elections happen once and cannot be undone.
Costs and risks: gain harvesting at 0% still raises the income that sets Social Security taxation, IRMAA and the Colorado cliff.
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Your own retirement plan (solo 401(k) to $72,000, defined benefit plans far beyond), the S election at the right income, keeping the QBI deduction, hiring your children and spouse, the home office, vehicles and the 6,000-pound line, the HSA through the business, Colorado’s PTE election, moving income across December 31, and the accountable plan and log.
A business owner decides nearly everything an employee can’t: how the business is taxed, what is salary, what it buys and when, who it employs, and how much goes into a plan.
Ten strategies ordered by payoff for an owner with $80,000 to $400,000 of profit, each with the condition that makes it hold up on examination.
The November planning meeting with year-to-date profit is where all of them except the paperwork are decided.
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Catch-up contributions including the new $11,250 at 60–63, the Roth conversion window between the last paycheck and the first RMD, the 55 rule and reaching money early, Social Security timing with tax in the picture, the two-year IRMAA lookback, the HSA until Medicare, net unrealized appreciation, pension or lump sum, and Colorado’s $20,000 subtraction at 55.
The years from about 55 to 73 are a one-time planning window: income drops, RMDs haven’t started, Social Security can wait, and the low brackets sit empty.
Nine strategies that have to be done inside the window, ordered by when they come up, with the cliffs that every one of them touches.
The 55 rule is lost by rolling the 401(k) to an IRA; the IRMAA lookback starts at 63; the HSA stops six months before Part A.
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Qualified charitable distributions instead of checkbook giving, the senior deduction line, gains at 0%, which account to spend first, RMD timing and the December withholding trick, beneficiaries after the ten-year rule, Roth conversions after 73, the medical deduction in a high-cost year, long-term care premiums, and Colorado’s $24,000 subtraction and $95,000 cliff.
A retiree’s tax is set less by how much income arrives than by which income and in what order; each threshold is a place where a dollar costs more than its bracket, and a place where moving a dollar saves more.
Ten strategies; the QCD is the most useful single item on the page, and the beneficiary form is the one that matters most to the people who come after.
The December withholding on the RMD replaces four estimated payments.
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The last joint return and the two qualifying-surviving-spouse years, selling the house inside the two-year and three-year windows, recording the step-up, the spousal IRA rollover decision under 59½, converting while the brackets are still joint, the QDRO and penalty-free cash, who claims the children, Form SSA-44 for Medicare, and Colorado’s PERA and homestead rules.
A death or a divorce changes the filing status, and the status changes every threshold on the return. The widow’s penalty is permanent; the transition windows are not.
Nine strategies with specific deadlines, written for the worst time anyone has to think about tax.
The three things to do in the first months after a death: the appraisal and broker letter, the IRA decision, and the SSA-44.
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Every deferral available, the backdoor and mega backdoor Roth, bunching appreciated stock into a donor-advised fund, the Colorado PTE election, entity and salary at the QBI threshold, the cash balance plan, real estate and the professional route, QSBS and opportunity zones, charitable remainder trusts, and managing the SALT phase-down and the other cliffs.
Above about $400,000 the credits phase out and the 2025 act trimmed the deductions; what remains is built for savers and business owners, and it is substantial.
Ten strategies ordered by how many high-earning households can use each; the first four apply to almost any W-2 over $250,000, the rest need a business, a property or a startup.
The cash balance plan is the largest deduction in the code for an owner over 50; the cliffs page is the catalogue of what to steer around.
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Grandparents, parents and children on one plan: the $19,000 exclusion and paying the school directly, what to give and what to hold for the step-up, QCDs from the IRA, converting to Roth for the heirs, front-loading a grandchild’s 529, filling the parents’ pre-tax accounts, a child on the payroll, the new Trump account and its $1,000 deposit, the custodial Roth, the kiddie tax, and Colorado’s rules on each.
A family does its tax planning on three returns at once. The grandparents’ return decides what passes down and when; the parents’ return is where the deductions live; the children’s returns are the longest compounding runway in the family and the one most often left empty.
Thirteen strategies from oldest to youngest, with the 2026 figures: $19,000 per recipient, $111,000 of QCDs, $95,000 into a 529 at once, $24,500 of deferral, $16,100 tax-free to a working teenager, $7,500 into a custodial Roth, and the Trump account’s $1,000 and $5,000 a year, with an honest comparison of the Trump account against the 529 and the Roth.
Costs and risks and cautions for the preparer cover the kiddie tax, the UTMA handover at 21, the carryover basis on gifts, the ten-year rule on inherited IRAs, and the cross-generation interactions where one return’s move changes another’s number.
Colorado
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Ten things that make Colorado different: a voter-controlled flat rate, TABOR refunds that swing from $750 to zero, credits that switch off with the economy, big retiree breaks, and the $300,000 cliff. Start here.
Colorado’s income tax looks simple: one flat 4.40% rate, no local income taxes, a return that starts from your federal numbers. The surprises come from its personality.
- Voters set the rate, and in November 2026 they’ll decide Amendment 87, which would replace the flat tax with six brackets from 3.7% to 8.4%.
- TABOR caps what the state can keep. The refund was $750 a person in 2022, $19–$59 in 2025, and nothing for 2026.
- Credits come and go. The family affordability credit (up to $3,273 per young child in 2025) is off for 2026; the EITC match fell from 50% to 25%.
- Retirees do well here. No tax on Social Security at 65, or at 55–64 under income limits, and up to $24,000 per person for pension and IRA income, a cap Social Security uses first.
- The $300,000 cliff. Above that AGI, most of your federal deduction is added back; nearly all of it from 2026.
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A short page on purpose. It lists only what is already law for Colorado tax year 2027 and later, explains what the November 3 ballot could change, and says why the list will grow before that return is filed.
Tax year 2027 is the return filed in early 2028. Some of what will be on it is already written into law with a start or stop date, and those items are listed here.
Everything else is a proposal, a forecast or a rumor. Colorado’s General Assembly meets from January to May every year and changes the income tax almost every session, so this list will be longer by the time the 2027 return exists.
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The domicile and six-month residency tests, the part-year return (DR 0104PN), which income Colorado taxes before and after the move, the credit for taxes paid to another state, remote work, pensions and PERA after you leave, the 2% withholding on a nonresident home sale, and the TABOR refund.
You are a Colorado resident if you are domiciled here, or if you keep a permanent home here and spend more than six months of the year in it. In the year of a move you file a part-year return that apportions income to the months you lived here.
Wages are taxed where the work is physically done; Colorado has no convenience-of-the-employer rule. Retirement income, including Colorado PERA, cannot be taxed by Colorado once you are a resident elsewhere. Colorado real estate is Colorado-source forever, and a nonresident seller has 2% of the price withheld at closing.
Colorado residents taxed by another state on the same income get a credit on DR 0104CR. The TABOR sales-tax refund requires a full year of residency, so a November departure forfeits it. Moving expenses are not deductible except for the military.
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The complete picture for the return you file in 2026: the 4.40% rate, the TABOR refund table, every addition and subtraction, every credit with amounts, and the mistakes we fix most often.
Colorado starts from federal taxable income and applies one 4.40% rate. What makes a Colorado return is what the state adds back (state tax you deducted, part of your deduction if AGI is $300,000 or more, out-of-state muni bond interest), what it lets you subtract (pension income, Social Security, 529 contributions, charitable gifts for non-itemizers), and a long list of credits.
The credits are where preparers who don’t know Colorado leave money behind: the child tax credit, family affordability credit, child care credit, care worker credit, Colorado Promise tuition credit, and the EITC match are all refundable, and most are open to ITIN filers. The article has the 2025 amounts and income limits for each, plus a section on the eight things that trip people up.
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The rate back to 4.40%, the TABOR refund down to $19–$59, four new credits, a bigger Social Security break for ages 55–64, what quietly ended, and a rumor check on the things that didn’t change.
Checked against the Department of Revenue’s own publications. The real changes for 2025:
- Social Security: ages 55–64 now subtract all of it if AGI is $75,000 or less (single) / $95,000 (joint). Nothing changed for 65 and older.
- New credits: a $1,200 care worker credit, the Colorado Promise tuition credit, a disability assistance credit of $400–$1,200, and a wildfire mitigation credit.
- Gone: the senior housing credit (2024 only), and several subtractions repealed by a cleanup bill.
- The federal July 2025 law: the tips, overtime and senior deductions all flow through to Colorado for 2025. Overtime gets added back starting 2026.
The article also runs through six things we’ve seen in “tax update” handouts that are wrong, including a supposed 50% QBI addback and a 4.63% overtime withholding rate. Neither exists.
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No TABOR refund at all, overtime taxed again, the EITC cut to 25%, the family affordability credit switched off, a much tougher deduction addback over $300,000, and the November ballot measures that could replace the flat tax.
Tax year 2026 is the return you’ll file in early 2027, and it will look different. Already law:
- No TABOR refund. Revenue came in about $176 million under the cap, so there’s no sales tax refund and no rate cut for 2026.
- Overtime addback. The federal “no tax on overtime” deduction is added back on the Colorado return (HB25-1296). Tips are not.
- Proposition MM. Filers with AGI of $300,000 or more add back their federal deduction above $1,000 / $2,000, down from $12,000 / $16,000.
- Smaller credits. Family affordability credit off; EITC match 25% instead of 50%; EV credit $750. The child care credit grows to 70% of the federal credit.
On the ballot November 3: Amendment 87 (a graduated income tax from 3.7% to 8.4%, starting 2027), Proposition 136 (cap the rate at 4.4%), and Proposition NN (keep more revenue for schools, fewer refunds). The article keeps enacted law and proposals clearly separate, and ends with what to do now if you earn overtime, get the family credit, or are near $300,000.
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Why Colorado is one of the better states to retire in for tax purposes, how the Social Security and pension subtractions share one cap, the 55–64 income cliff, and the mistakes we fix every season.
Social Security. At 65 and older, none of it is taxed in Colorado, regardless of income. Starting with 2025 returns, ages 55 to 64 get the same treatment if federal AGI is $75,000 or less (single) or $95,000 or less (joint).
Pensions, IRAs and 401(k)s. Each person 65 or older gets up to $24,000; ages 55 to 64, up to $20,000. But the cap is shared: your Social Security subtraction uses it up first, and only what’s left covers pension and IRA income. With $15,000 of taxable Social Security, a 68-year-old can subtract only $9,000 of IRA withdrawals, not $24,000. It’s per person, so each spouse has a cap, but one spouse’s unused room can’t be shifted to the other. Military retirees under 55 get $15,000.
The 55–64 cliff. One dollar over $75,000 / $95,000 and the full Social Security subtraction drops back to $20,000. It only matters if your taxable Social Security alone is over $20,000, but then a large IRA withdrawal or Roth conversion in the wrong year can cost real money.
The mistakes. Social Security left in Colorado income, the subtraction taken once for a couple instead of twice, or the $24,000 stacked on top of Social Security. Colorado returns can generally be amended for four years.
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The question that disappeared from the 2025 Colorado return: what use tax is, who still owes it now that Amazon and the rest collect, the 2.9% plus district rate, and the separate return it moved to.
Use tax is the sales tax’s twin, owed by the buyer when the seller did not collect. Since 2019 nearly every online retailer collects Colorado tax, so the list of what is left is short: small out-of-state sellers, purchases on trips to no-sales-tax states, private-party purchases. The page covers the rate, the DR 0252 and Revenue Online filing that replaced the DR 0104US, the cars and building materials where the tax is already collected at registration or the permit counter, and what we ask at the desk.
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What the Taxpayer’s Bill of Rights is, how Colorado has refunded its surpluses through the income tax return since 1992, and why there is no refund for 2026.
The 1992 amendment, Douglas Bruce, the revenue cap and how a surplus comes back to you: six-tier refunds, temporary rate cuts, the 2022 Cash Back checks, Referendum C, the full-year residency requirement, and the current forecast.
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Colorado’s itemized-deduction addback for AGI of $300,000 or more takes the charitable deduction with it, and Proposition MM cut the allowance to $1,000/$2,000 for 2026.
A worked example on a $400,000 couple, the cliff at $300,000, how the rule evolved from 2022 to Proposition MM, what other states did, and what donors can still do: qualified charitable distributions, appreciated stock, timing gifts around the threshold, and Colorado’s own contribution credits.
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What happens when you don’t file a Colorado return: the Department’s estimated returns, liens and collections, penalties and interest, the four-year refund window, payment plans, and how to get caught up.
Colorado follows the IRS’s lead on unfiled years but has its own clock, its own estimated-return process and its own collections section. The page walks through what the Department does, what it costs, which years still pay a refund, and the order of operations for getting current on both returns at once. Companion to our federal unfiled and overdue returns page.
Tax law & planning
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Our biggest planning article: ways to save for working families, taxpayers 65 and older, investors, people giving to family or charity, and parents paying for school. Figures current as of October 1, 2026.
Most tax savings come from decisions made during the year, not at filing time. This article collects the ones we see make the biggest difference, with the 2026 numbers for each:
- Working families. Health and dependent care FSAs (the dependent care limit rose to $7,500 for 2026), the child care credit, whether a second paycheck really pays, and head of household status for people supporting a parent or relative.
- Taxpayers 65 and older. The new $6,000 senior deduction, deducting Medicare premiums, paying a parent’s medical bills, continuing care community fees, giving to charity from your IRA (QCDs), and Colorado’s retiree breaks.
- Retirement accounts. 2026 contribution limits, early withdrawals without the 10% penalty, rollover traps, and the 10-year rule for inherited IRAs.
- Investors. The 0% capital gains bracket, gifting appreciated stock, the kiddie tax, harvesting losses, the $40,400 SALT cap, and the new charitable deduction rules.
- Gifts, estates, and education. The $19,000 gift exclusion, the $15 million estate exemption, 529 plans, employer help with student loans, and why student loan forgiveness is taxable again.
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A timeline of every major federal tax law since the year the Tax Shop opened, from the 1969 minimum tax to the One Big Beautiful Bill Act, with a page on each.
Thirteen stops on the timeline: 1969, the IRA and 401(k) laws of the 1970s, the 1981 rate cuts, the 1983 law that first taxed Social Security, the 1986 reform, the 1990 and 1993 budget acts, the 1997 Roth IRA law, the Bush tax cuts and the fiscal cliff, the Affordable Care Act, the 2015 PATH Act, the 2017 Tax Cuts and Jobs Act, the pandemic and retirement laws of 2019–2022, and the 2025 law that made the 2017 rules permanent. Each page gives the date, why it happened, what it changed with the real numbers, what has since been undone, and what it meant for an ordinary household. The 1986, 2017 and 2025 pages are the long ones.
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Why tax planning is hard when laws change, provisions expire, and IRS guidance lags, and practical ways to plan around what isn’t settled yet.
Tax planning would be simple if the rules held still. They don’t. Congress passes major changes every few years, many provisions have expiration dates, IRS guidance on new rules often arrives months later, and Colorado doesn’t always follow federal changes.
Right now, the new deductions for tips, overtime, car loan interest, and seniors run only through 2028, and the higher SALT cap drops back to $10,000 in 2030.
The practical answer is to plan for the rules you know, keep flexibility for the ones you don’t, and review your situation each year before December 31, not just at filing time.
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Short-term versus long-term gains, the 2026 rates, and why many people pay 0%.
When you sell stock, real estate, or other investments for more than you paid, the profit is a capital gain. How it’s taxed depends mostly on how long you owned the asset.
- Short-term (one year or less) gains are taxed like wages, at your ordinary rate.
- Long-term (more than one year) gains get lower rates:
2026 rate Single Married filing jointly 0% Taxable income up to $49,450 Up to $98,900 15% Up to $545,500 Up to $613,700 20% Above $545,500 Above $613,700 Those thresholds are based on your total taxable income, including the gain. Many retirees and moderate-income families pay nothing on long-term gains and don’t know it. A married couple with $80,000 of taxable income, including a $20,000 long-term gain, owes 0% federal tax on that gain.
Other things that matter:
- Basis. Your gain is the sale price minus your basis, which is generally what you paid plus improvements. Inherited property usually gets a “stepped-up” basis to its value at the date of death. Gifted property keeps the giver’s basis.
- Losses offset gains, and up to $3,000 of excess loss a year can offset other income, with the rest carried forward.
- Rental property has an extra layer: depreciation you took is taxed at up to 25% when you sell.
- Net investment income tax. An extra 3.8% applies when income exceeds $200,000 single or $250,000 joint.
Colorado taxes capital gains as ordinary income at its flat rate. Related topics: Selling Your Home, Selling a Rental Property, 1031 Property Exchanges.
Have a question you’d like to see covered? Call us at 303-734-1040 or email 1040@taxshop.tax.
Disclaimer
Each article on this page is provided by Tax Shop for general informational purposes only. It is not tax, legal, accounting, or investment advice, and it should not be relied on as a substitute for advice from a qualified professional who knows the facts of your situation.
Tax laws, IRS guidance, limits, and deadlines change often. Each article on this page reflects the law as we understood it on the date shown, and we do not undertake to update it after it is published. Information may be incomplete, may not apply to your circumstances, or may be affected by state law.
Reading each article on this page, or contacting us through this website, does not create a client or professional relationship with Tax Shop. A professional relationship begins only when we agree in writing to provide services to you.
Before acting on anything you read here, please consult your tax professional. Tax Shop is not responsible for any loss, penalty, or tax resulting from actions taken or not taken based on this information. Links to outside websites are provided for convenience; we do not control and are not responsible for their content.
Social Security is not taxed like wages. A formula decides how much of it counts, and the formula uses dollar lines set in 1983 and 1993 that have never been adjusted for inflation.
In 1984 about one retiree in ten paid tax on benefits; today it is more than half (verify), with no change in the law. Understanding the formula is the difference between a retiree who is surprised in April and one who sized the IRA withdrawal in November.
Read the full article →
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