Welcome to 2026! With a new year comes many new business changes. And something that impacts all businesses and workers is taxes. When the “One Big Beautiful Bill Act” was signed into law last year, it included multiple changes to the tax code that will retroactively impact 2025 tax filings. While some of those changes involved permanently extending the tax cuts from 2017, there are also new changes. So today, let’s talk about some of those changes.
Income taxes
The IRS released new federal income tax brackets for the 2026 tax year (for returns to be filed in 2027), which headlines are claiming may “boost your take-home pay.” The inflation-based changes increase the income range for the lowest two tax brackets by 4% and the higher brackets by 2.3%. Most notably, the standard deduction increased 2.2% from $15,750 to $16,100 for single filers and from $31,500 to $32,200 for joint filers. However, the impact of inflation is likely to negate any small gains in pay for the majority of workers. As one policy executive told CNBC, “For most workers, we’re talking about a couple of dollars a paycheck.” Considering the cost of food alone has risen 17% from Jan. 2022 to Nov. 2025, those extra dollars may not even be noticeable.
An additional change for taxpayers 65 and over is an additional $6,000 deduction on their federal income taxes, which phases out at a 6% rate for single filers earning over $75,000 ($150,000 for joint filers). The stated aim of the deduction is to offset taxes on Social Security income and has been hailed by the administration as “the largest tax break in American history for our nation’s seniors.” Experts have their doubts that the deduction – which is slated to sunset in 2028 – will make up for cuts to Social Security benefits that are likely to happen with the reduction in taxes the federal government is collecting.
Other changes to federal income taxes include new deductions for qualified tips and overtime pay. Despite the title of the provisions implying the federal government won’t tax tips and overtime, there are, of course, caveats and exemptions to both provisions that employers and employees should be aware of.
State impacts
It’s important to note that while these changes are at the federal level, they may have an impact on state income taxes. State legislators often take their cues from the federal government and choose to either conform to or reject the changes at the state level. Several states, including Iowa, Montana, and Oregon, automatically conform to federal changes, while other states may proactively pass legislation to either fully or partially conform to the changes.
Other states may choose not to adopt the federal changes, primarily to protect their budgets. For example, Colorado legislators convened a special session last August to make adjustments to their tax code in order to plug the $1.2 billion hole the new tax code had created in their recently passed budget. As Colorado is one of the states that automatically conforms to federal changes as soon as they take effect (referred to as “rolling conformity”), legislators had to make adjustments to rebalance their budget, which included decoupling certain aspects of the new code. This included opting out of exempting overtime pay from state income taxes.
Business tax breaks
One of the biggest contributors to Colorado’s budget dilemma was an estimated $950 million in lost revenue from the reduction in corporate income taxes. The “Big Beautiful Bill” primarily extends corporate tax changes that went into effect in 2017 and have either already begun to phase out or were set to expire shortly.
In addition, the new law includes “incentives for businesses to invest in their enterprises” through “bigger write-offs for capital expenditures and research and development spending,” along with additional and expanded tax breaks. For example, starting this year, employers can use a tax credit of up to 40% of “qualified child care expenses,” capped at $500,000, for providing child care assistance to employees. This is an increase from the previous rate of 25% and a cap of $150,000.
