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 law enacted by President Donald Trump. However, the relief does not automatically flow through to state returns, and the gap between federal and state treatment is causing considerable confusion ahead of the deadline.
It is up to each state to decide whether to match federal tax changes, and many have chosen not to do so. In states that do not conform to the federal changes, workers who receive a federal deduction for tips or overtime will still owe state taxes on those earnings.
A Handful of States Follow the Federal Lead
Only around half a 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 United States. All three 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, while Alabama offers only the auto loan deduction.
The mechanism by which states adopt these changes varies considerably. In some states, laws automatically apply federal tax changes to state income taxes unless officials opt out, as Colorado did on the overtime deduction. In others, the breaks are available only if officials updated state law, as Idaho did.
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.
Arizona’s Unusual Position Draws Legal Scrutiny
Perhaps the most striking case is Arizona, where state income tax forms currently list deductions for tips, overtime and auto loans, based on a November executive order from Democratic Governor Katie Hobbs, despite no corresponding change in state law.
Hobbs had assumed the Republican-led Legislature would pass a bill putting the tax breaks into law, but she subsequently vetoed two such bills, objecting to provisions that would also have adopted Trump’s corporate tax breaks. Lawmakers have not yet passed a third attempt.
Adam Chodorow, a law professor at Arizona State University specialising in tax law, described the situation as “extraordinarily unusual,” warning that many residents will likely claim deductions “who aren’t legally entitled to do so“, but are doing so because they have been instructed by the state government.
Wisconsin’s Republican-led Legislature passed bills to allow the tips and overtime deductions, but Democratic Governor Tony Evers vetoed them on 3rd April. Officials in Georgia, Indiana and Michigan have enacted laws allowing such deductions, though only from the 2026 tax year onwards, meaning they offer no relief to those currently filing 2025 returns.
Oregon, meanwhile, could move in the opposite direction, with legislation pending before Democratic Governor Tina Kotek that would stop offering the auto loan deduction and some corporate tax breaks from 2026.
