JEFFERSON CITY, Mo. (AP) — To tax tips or not? That is a question that will confront lawmakers in states across the U.S. as they convene for work next year.
President Donald Trump’s administration is urging states to follow its lead by enacting a slew of new tax breaks for individuals and businesses, including deductions for tips and overtime wages, automobile loans, and business equipment.
In some states, the new federal tax breaks will automatically apply to state income taxes unless legislatures opt out. But in many other states, where tax laws are written differently, the new tax breaks won’t appear on state tax forms unless legislatures opt in.
In states that don’t conform to the federal tax changes, workers who receive tips or overtime will pay no federal tax on those earnings but could still owe state taxes on them.
States that embrace all of Trump’s tax cuts could provide hundreds of millions of dollars in annual savings to certain residents and businesses. However, this choice could financially strain states, which are being hit with higher costs due to new Medicaid and SNAP food aid requirements included in the legislation.
Most states begin their annual legislative sessions in January. To retroactively change tax breaks for 2025, lawmakers would need to act quickly so that tax forms can be updated. States may also decide to apply changes to their 2026 taxes, allowing for more time. Currently, skepticism surrounds these tax breaks, with legislative sessions yet to see significant decisions made.
Treasury Secretary Scott Bessent has publicly called on states to urgently conform to federal tax cuts, criticizing those that haven’t as engaging in 'political obstructionism.' Yet, even Republican-led states have been slow to opt in, facing pressures from budgetary constraints. With only Michigan having decided to adopt some tax breaks for tips and overtime, the landscape remains complex as potential implications weigh heavily on both state finances and resident relief.
President Donald Trump’s administration is urging states to follow its lead by enacting a slew of new tax breaks for individuals and businesses, including deductions for tips and overtime wages, automobile loans, and business equipment.
In some states, the new federal tax breaks will automatically apply to state income taxes unless legislatures opt out. But in many other states, where tax laws are written differently, the new tax breaks won’t appear on state tax forms unless legislatures opt in.
In states that don’t conform to the federal tax changes, workers who receive tips or overtime will pay no federal tax on those earnings but could still owe state taxes on them.
States that embrace all of Trump’s tax cuts could provide hundreds of millions of dollars in annual savings to certain residents and businesses. However, this choice could financially strain states, which are being hit with higher costs due to new Medicaid and SNAP food aid requirements included in the legislation.
Most states begin their annual legislative sessions in January. To retroactively change tax breaks for 2025, lawmakers would need to act quickly so that tax forms can be updated. States may also decide to apply changes to their 2026 taxes, allowing for more time. Currently, skepticism surrounds these tax breaks, with legislative sessions yet to see significant decisions made.
Treasury Secretary Scott Bessent has publicly called on states to urgently conform to federal tax cuts, criticizing those that haven’t as engaging in 'political obstructionism.' Yet, even Republican-led states have been slow to opt in, facing pressures from budgetary constraints. With only Michigan having decided to adopt some tax breaks for tips and overtime, the landscape remains complex as potential implications weigh heavily on both state finances and resident relief.
