Does Your State Also Give You No Tax on Tips and Overtime?

Many workers expected the new federal tax breaks for tips and overtime to automatically carry over to their state return. In practice, that isn’t always the case. Because every state decides whether to adopt new federal tax provisions, two workers earning the same income could face very different state tax bills depending on where they live.

Why Doesn’t Every State Follow the Federal Rule?

The difference comes down to how each state connects its tax system to the federal tax code. Some states use what’s known as rolling conformity, meaning they automatically follow current federal taxable income unless lawmakers choose to opt out. Others use static conformity, which ties their tax system to an earlier version of federal law and requires new legislation before any federal tax change takes effect.

That distinction explains why the map looks so different across the country. Some legislatures have chosen to adopt the new deductions, while others have kept their existing rules because matching the federal changes could reduce state tax revenue. In rolling conformity states, the deductions generally apply automatically unless lawmakers later decide to decouple from federal law.

Which States Have NOT Adopted the Deductions?

States that have explicitly declined to conform include:

• New York: uses a static conformity starting point (federal AGI), so tipped and overtime workers in New York do not get the deduction on their state return, only the federal one.
• California: state leadership has signaled no plan to adopt the deductions, with an estimated cost of roughly $3.2 billion a year in lost state revenue cited as the reason.
• Illinois: requires taxpayers to add the deducted tip and overtime income back in on their state return, since the state says it cannot absorb the revenue loss.

Workers in these states may still owe state income tax on tips or overtime pay, even if those amounts qualify for the federal deduction. The federal tax break lowers federal taxable income, but it does not automatically reduce what is taxable under state law.

Example: Consider two restaurant servers who each earn $20,000 in tips during 2026. Both qualify for the federal deduction. The only difference is the state where they work and file taxes. The server in Oregon may receive the deduction on both the federal and state return, while the server in California could still owe state income tax on those same tips because California has not adopted the federal rule.

Which States Automatically Conform?

States with rolling conformity, including Iowa, Montana, North Dakota, and Oregon, generally recognize new federal deductions without requiring lawmakers to pass a separate conformity bill. Unless lawmakers later choose to decouple from federal law, eligible taxpayers in these states typically receive the same deduction for state income tax purposes.

How Do You Check Your Own State?

• The easiest way to confirm your state’s treatment is to check your Department of Revenue’s guidance on OBBBA conformity, since state legislatures can update these rules during each legislative session.
• If you use tax software, make sure it has been updated with your state’s latest conformity decisions before estimating your refund or filing your return. A tax professional can also confirm whether your state requires any adjustments.
• Federal and state tax calculations don’t always match. Before estimating your refund or changing your withholding, confirm whether your state follows the federal deductions. Otherwise, you could overestimate your tax savings.

If you are unsure how the deduction interacts with your occupation eligibility or your W-2 in general, see our guide on decoding the new 2026 W-2 codes for tips and overtime.

Does This Affect How Much You Should Withhold?

Yes. If your state has not adopted the federal deductions, your federal withholding may decrease while your state withholding stays the same. That difference can lead to a larger federal refund but little or no reduction in your state tax bill. Reviewing your W-4 withholding with your specific state’s rules in mind can help you avoid a surprise state tax bill even while your federal refund grows.

FAQ

Does my state tax my tips if the federal government doesn’t?

Not always. As of 2026, roughly half of states with a broad income tax still tax tips even though the federal government allows the deduction for eligible workers.

Does California tax overtime pay in 2026?

Yes. California continues to tax overtime wages under state law, even though eligible workers can claim the federal overtime deduction on their federal return.

Which states automatically follow the new federal tax deductions?

States with rolling conformity to federal tax law, including Iowa, Montana, North Dakota, and Oregon among others, generally pick up new federal deductions like this one automatically, unless they pass a law to decouple.

Do I need to do anything differently on my state return?

Possibly. In states that do not follow the federal deductions, part or all of the income excluded on your federal return may need to be included again when calculating your state taxable income. Your state’s filing instructions will explain whether an adjustment is required.

Bottom Line

The new OBBBA deductions can reduce your federal taxable income, but they don’t automatically change how your state taxes tips or overtime pay. Before estimating your savings, take a few minutes to confirm whether your state follows the federal rules. Spending a few minutes checking your state’s conformity rules now could save you from an unexpected tax bill when you file your return.

State conformity rules can change as legislatures update their tax laws, so the information above should be viewed as a 2026 snapshot rather than a permanent list. If you’re unsure how your state applies these deductions, consult your Department of Revenue or a licensed CPA before filing.