Discrepancy Between Federal and State Tax Breaks for Tips and Overtime

As the tax-filing deadline nears, millions of Americans are expected to claim new federal income tax breaks for tips and overtime wages available for the first time under a wide-ranging tax law enacted by President Donald Trump.

But many people won’t get those same deductions when they fill out their state income tax forms. That is because it is up to each state to decide whether to match federal tax changes, and many have decided not to do so.

In states that don’t conform to the federal tax changes, workers who receive a federal tax deduction for tips or overtime still will owe state taxes on those earnings.

The tax-filing deadline is Wednesday for the federal government and most states. Here is what to know about state income tax rates and deductions:

In most states, individuals must fill out two separate tax forms. First, the federal income tax form. Then a state income tax form. The order matters, because most states use figures from the federal tax form as the starting point for their state tax calculations.

No income tax is levied in eight states — Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas and Wyoming. Washington state taxes income from capital gains but not wages and salaries. Missouri taxes income from wages and salaries but not capital gains.

Only about a half-dozen states are mirroring Trump's law by offering tax breaks on tips and overtime wages or for loan interest on new vehicles assembled in the U.S.

All three of those tax deductions are available to state income taxpayers in Idaho, Iowa, Montana, North Dakota and Oregon. Colorado offers the tips and auto loan deductions but not the overtime tax break. Alabama offers only the auto loan deduction.

Laws in several states automatically apply federal tax changes to state income taxes unless the governor and lawmakers opt out — like Colorado officials did on the overtime tax deduction. But in most states, the tax breaks are available only if officials updated their state laws, like they did in Idaho.

State income tax forms in Arizona list tax deductions for tips, overtime, auto loans and older residents based on a November executive order from Democratic Gov. Katie Hobbs. She assumed the Republican-led Legislature would later pass a bill putting the tax breaks into state law.

But Arizona law remains unchanged. Hobbs vetoed two tax-break bills because she objected to provisions that also would have adopted Trump's corporate tax breaks. And lawmakers have not passed a third attempt.

“It’s an extraordinarily unusual situation,” said Adam Chodorow, a law professor at Arizona State University who specializes in tax law.

“We will likely have lots of people deducting tips” and overtime wages “who aren’t legally entitled to do so,” he said. “But they are being instructed by the state government to take those deductions.”

It is possible that Arizona still could enact a law officially allowing the deductions; it could even be done retroactively, after the tax-filing deadline.

Tipped workers and overtime earners almost got tax breaks this year in some additional states.

South Carolina extended its deadline to file for tax refunds to Oct. 15 to allow time for the Republican-led Legislature to opt in to the federal tax deductions. Legislation to do so passed the House but got defeated in the state Senate.

Wisconsin's Republican-led Legislature passed bills to allow the tips and overtime deductions. But Democratic Gov. Tony Evers vetoed them on April 3.

Officials in Indiana, Georgia and Michigan have passed legislation that would allow tax deductions for tips and overtime wages starting with the 2026 tax year. That means they aren't available for people currently filing their 2025 tax returns.

Oregon, meanwhile, is moving in the other direction. Legislation signed by Democratic Gov. Tina Kotek would stop offering the auto loan deduction and some corporate tax breaks for the 2026 tax year.

Other states could still opt in or out of the tax deductions for their 2026 taxes.