Federal Tax Breaks for Tips and Overtime Vary Across States

Many states have not adopted new federal deductions, leaving workers to pay higher state taxes.

Apr. 13, 2026 at 2:05am

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A minimalist illustration using bold geometric shapes and clean lines in navy blue, mustard yellow, and slate grey to conceptually represent the uneven adoption of federal tax deductions across different states.Uneven state tax policies create an unbalanced landscape for workers claiming new federal deductions.Queens Today

As the tax-filing deadline approaches, millions of Americans can claim new federal income tax breaks for tips and overtime wages under a recent law, but many states have not chosen to mirror these changes, leaving workers in those states to still owe state taxes on those earnings.

Why it matters

The lack of state-level conformity with the federal tax changes means workers in some states will receive a federal deduction while still owing state taxes on the same income, creating uneven tax burdens across the country.

The details

The new federal tax law enacted by President Trump allows deductions for tips and overtime wages, but states have the option to adopt or reject these changes. Only about half a dozen states are mirroring the federal tax breaks, while most states continue to tax tips and overtime at the state level. Some states, like Arizona, have created an unusual situation where the governor has instructed residents to take the deductions even though the state law has not been updated.

  • The tax-filing deadline is Wednesday, April 15, 2026 for the federal government and most states.
  • Several states, including Indiana, Georgia, and Michigan, have passed legislation to allow the tips and overtime deductions starting in the 2026 tax year.

The players

Donald Trump

The former president who signed the federal tax law that created the new deductions for tips and overtime wages.

Katie Hobbs

The Democratic governor of Arizona who issued an executive order instructing residents to take the tips and overtime deductions, even though the state law has not been updated.

Tina Kotek

The Democratic governor of Oregon who signed legislation to stop offering the auto loan deduction and some corporate tax breaks starting in the 2026 tax year.

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What they’re saying

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

— Adam Chodorow, Law professor at Arizona State University

What’s next

It is possible that Arizona could still enact a law officially allowing the tips and overtime deductions, even retroactively after the tax-filing deadline.

The takeaway

The uneven adoption of the federal tax breaks for tips and overtime across states means workers in some parts of the country will receive a tax benefit while those in other states will not, highlighting the complexities of the U.S. tax system and the importance of state-level policy decisions.