With the tax filing deadline looming, millions of Americans are gearing up to claim new federal tax breaks related to tips and overtime pay for the first time, thanks to President Donald Trump’s extensive tax reforms.
However, a significant number of individuals won’t be able to enjoy the same deductions when filling out their state income tax forms. Each state determines whether to adopt the federal tax changes, and many have opted not to do so.
In states that haven’t aligned with federal tax updates, workers who benefit from federal tax credits for tips and overtime are still required to pay state taxes on that income.
The deadline for both federal and most state tax filings is Wednesday. Here’s what you should know regarding state income tax rates and deductions.
41 states impose taxes on wages and salaries
Most states necessitate that individuals complete two tax forms: first, the federal income tax form, followed by the state income tax form. The sequence matters, as many states use the federal tax form as a basis for their state tax calculations.
There are eight states without an income tax: Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, and Wyoming. Washington state taxes capital gains but not wages and salaries, while Missouri does the opposite—taxing wages but not capital gains.
Most states continue to tax tips and overtime pay
Only around six states are following Trump’s legislation regarding tax breaks for tips and overtime pay, as well as interest on loans for domestically manufactured vehicles.
Tax credits for these areas can be claimed by state income taxpayers in Idaho, Iowa, Montana, North Dakota, and Oregon. Colorado offers a deduction for tips and auto loans but lacks a deduction for overtime. Alabama provides deductions solely for auto loans.
Some states automatically adapt federal tax changes for their income taxes unless the governor or legislature opts out, as seen in Colorado where officials chose not to adopt the overtime tax credit. In most other states, however, tax breaks require a legislative update, which is the case in Idaho.
Arizona has a unique approach to tax credits
Arizona’s state income tax returns feature credits for tips, overtime, car loans, and senior citizens, following an executive order from Democratic Governor Katie Hobbs. She anticipates that the Republican-led Legislature will later formalize these tax cuts in state law.
Yet, Arizona law hasn’t changed thus far. Hobbs vetoed two tax-cut bills because she opposed some of their provisions that would have adopted Trump’s corporate tax cuts as well. Legislators are still working on a third attempt.
“It’s quite an unusual circumstance,” stated Adam Chodorow, a tax law professor at Arizona State University.
“Many individuals will be claiming deductions for tips and overtime pay that, legally speaking, they bearen’t entitled to,” he noted. “But the state government has encouraged them to take those deductions.”
There remains a chance that Arizona may pass legislation to formalize these deductions, even possibly making it retroactive post-deadline.
Tax breaks have been cut in two states
There were hopes for tax breaks for tipped and overtime workers in additional states this year.
South Carolina has postponed its tax refund filing deadline to October 15 to allow its Republican-led Legislature more time to consider federal tax credits. A bill for this narrowly passed the House but failed in the Senate.
In Wisconsin, the Republican-led Legislature approved a bill permitting tip and overtime deductions, only for it to be vetoed by Democratic Governor Tony Evers on April 3.
Some residents must wait for tax breaks
Legislators in Georgia, Indiana, and Michigan have passed laws allowing tax deductions for tips and overtime pay, but these will not take effect until the 2026 tax year. Consequently, they aren’t applicable for anyone filing a 2025 return.
Conversely, Oregon might be heading in another direction. A proposed bill from Democratic Governor Tina Kotek aims to eliminate auto loan deductions and some corporate tax breaks starting in the 2026 tax year.
In other states, you might still have the option to claim a tax credit for your 2026 taxes.
