Add Colorado overtime deduction add-back (HB25-1296) from 2026

[DTrim99]

Adds Colorado's decoupling from the federal overtime deduction — a second-sweep gap.

Change

HB25-1296 (2025, Colorado Laws ch. 202, signed 2025-05-16) adds C.R.S. 39-22-104(3)(u): an add-back of "any overtime compensation excluded or deducted from federal gross income," effective January 1, 2026 (§18). Colorado starts from federal taxable income, which includes the federal IRC §225 overtime deduction, so this claws it back for CO.

Colorado still conforms to the federal tips deduction (IRC §224) — tips are not added back — and Colorado conformed for 2025 (§6 wasn't yet effective). A 2025 special-session repeal attempt (HB25B-1020) failed, so the add-back stands.

Why this is a real, verified rule (not a false positive)

The bill predates OBBBA (signed 5/16/2025; OBBBA July 2025), so I verified the mechanism directly: (3)(u) is section-agnostic — "any overtime compensation excluded or deducted from federal gross income" — drafted in anticipation of the federal deduction, so it automatically captures OBBBA's §225. Confirmed against the signed session law (§6, §18, §19 safety clause).

Implementation

• co_overtime_income_addback — mirrors the federal overtime_income_deduction, gated from 2026 via gov.states.co.tax.income.additions.qualified_overtime.in_effect
• added to the CO additions list from 2026
• tests: 2026 adds back the federal overtime deduction; 2025 conforms ($0); integration case in a full household

🤖 Generated with Claude Code

[codecov]

Codecov Report

✅ All modified and coverable lines are covered by tests.
✅ Project coverage is 100.00%. Comparing base (ff39625) to head (3c69ab2).
⚠️ Report is 16 commits behind head on main.

Additional details and impacted files

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  Coverage   100.00%   100.00%           
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  Files            1         1           
  Lines           18        12    -6     
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- Hits            18        12    -6     

Flag	Coverage Δ
unittests	100.00% <100.00%> (ø)

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[DTrim99]

Independent review + fixes applied

Independent review confirmed the policy is regulatorily correct against the signed act (HB25-1296, Ch. 202, §6 adds C.R.S. 39-22-104(3)(u) — overtime only; "tip" appears 0 times; §18 effective 2026). No critical issues. Applied all findings:

🟡 Should Address — fixed

• Corrected the "reaches zero after 2028" comment. The federal overtime deduction doesn't yet sunset in the model, so the add-back stays nonzero 2029+. The mechanism is right (it multiplies the federal deduction, so it auto-zeros once the federal sunset is modeled); the comment now says exactly that.
• Added wiring + regression tests: the add-back now has cases asserting it flows into co_additions in 2026 (and not 2025), plus a "tips are not added back" guard (tip_income_deduction set → co_overtime_income_addback: 0, co_additions: 0).

🟢 Suggestions — applied

• Co-located the variable under additions/qualified_overtime/ to match the federal_deductions/ and qualified_business_income_deduction/ peers.
• Trimmed the overlong reference title; adopted Case N test names with absolute_error_margin.
• Changelog .changed → .added (introduces a new variable/parameter).