Full Breakdown
Impacts of Trump's Tax Breaks on State Income Tax Deductions
4/14/2026, 3:07:29 AM
Overview of Federal Tax Changes
Under the tax law enacted by President Donald Trump, new federal income tax breaks for tips and overtime wages have been introduced. These changes are significant for many workers, particularly those in industries reliant on tips, as they can now claim deductions that were not previously available. However, the implementation of these federal tax breaks varies significantly at the state level, leading to disparities in tax obligations for workers across the United States.
State Responses to Federal Tax Changes
As of the upcoming tax-filing deadline, which is Wednesday for the federal government and most states, only a handful of states have opted to conform their tax laws to match the federal changes. States such as Idaho, Iowa, Montana, North Dakota, and Oregon have adopted the federal tax breaks for tips and overtime wages. Colorado has chosen to offer deductions for tips and auto loans but not for overtime wages. In contrast, Alabama has only adopted the auto loan deduction.
Notably, eight states, including Alaska, Florida, and Texas, do not levy any income tax, while others, like Missouri, tax wages but not capital gains. This patchwork of state tax laws means that many workers who benefit from federal deductions may still owe state taxes on those earnings.
Arizona's Unique Situation
Arizona presents a particularly unusual case. Despite the federal tax breaks, the state's laws remain unchanged due to vetoes by Democratic Governor Katie Hobbs on two tax-break bills that included provisions for corporate tax breaks. As a result, many Arizona residents may be instructed to deduct tips and overtime wages without a legal basis to do so. Adam Chodorow, a tax law professor at Arizona State University, noted, "We will likely have lots of people deducting tips and overtime wages who aren't legally entitled to do so."
Legislative Attempts and Future Implications
In South Carolina, efforts to extend the deadline for tax refunds to allow for the adoption of federal deductions were unsuccessful, as legislation passed the House but was defeated in the Senate. Similarly, in Wisconsin, tax breaks for tips and overtime were vetoed by Democratic Governor Tony Evers. Meanwhile, states like Indiana, Georgia, and Michigan have passed legislation to allow these deductions starting in the 2026 tax year, leaving current filers without access to these benefits.
Oregon is moving in the opposite direction, with new legislation signed by Governor Tina Kotek that will eliminate certain tax breaks for the 2026 tax year.
Conflicting Reports & Gaps
There are discrepancies regarding the adoption of federal tax breaks across states. While some states have embraced the changes, others have rejected them or have not yet passed the necessary legislation. The situation remains fluid, with potential for states to opt in or out of these deductions for future tax years.
Verbatim Quotes
- “We will likely have lots of people deducting tips" and overtime wages "who aren't legally entitled to do so," he said.” — Adam Chodorow, Law Professor, Arizona State University.
