October 11, 2026

"No Tax on Tips" in 2026: Which States Tax Your Tips Anyway?

The federal government stopped taxing your tips in 2026. Your state probably did not get the memo.

Under the One Big Beautiful Bill Act (OBBBA), signed on July 4, 2025, tipped workers can deduct up to $25,000 of tip income from their federal taxes. But that deduction only erases federal income tax. Whether you owe state income tax on the very same tips depends entirely on where you live, and most states still tax every dollar. As of 2026, the breakdown looks like this: nine states have no income tax on wages at all, 19 states have conformed to the federal tips deduction according to Ballotpedia's May 2026 state tracker, Georgia offers a smaller state-only version, and everyone else taxes your tips in full. If you earn tips in California, Illinois, or New York, the federal break does you no good at the state level.

What the Federal "No Tax on Tips" Deduction Actually Gives You

The new deduction, written into the tax code as Section 224, is available for tax years 2025 through 2028. Here is what it does and where its limits are:

• Up to $25,000 per tax return. The cap applies per return, not per person, and it phases out once your modified adjusted gross income passes $150,000 as a single filer or $300,000 filing jointly. It shrinks by $100 for every $1,000 over those thresholds.
• Everyone can claim it. It works whether you itemize or take the standard deduction, and you claim it on the IRS's new Schedule 1-A.
• Only reported tips count. Tips have to show up on a W-2, a Form 1099, or Form 4137. Cash tips you never report do not qualify.
• Your job has to be on the IRS list. The IRS finalized its occupation rules in April 2026, creating a Tipped Occupation Code system covering more than 70 occupations across eight categories, including food and beverage service, hospitality, personal care, and transportation. Your occupation must be one that customarily and regularly received tips by the end of 2024.
• Only voluntary tips qualify. Mandatory service charges and automatic gratuities do not count, even if your employer hands them to you.
• Social Security and Medicare still apply. The deduction covers income tax only. Every dollar of reported tips still gets hit with 6.2% Social Security tax (up to the $184,500 wage base) and 1.45% Medicare tax.

The House Ways and Means Committee estimated the provision cuts taxes by about $1,300 on average for tipped workers. If you want the federal math for your own situation, run your numbers through our free tip calculator to see your tip income and hourly rate side by side.

Why Your State Can Tax Tips the Federal Government Ignores

This is the part that surprises people. The tips deduction is claimed below the adjusted gross income (AGI) line on your federal return. It lowers your federal taxable income, but it does not lower your AGI. Rhode Island's Division of Taxation confirmed exactly this in an October advisory, explaining that the OBBBA tips and overtime provisions "are not reflected in federal adjusted gross income."

That one detail decides everything at the state level. Most states start their own tax calculation from your federal AGI. Since the tips deduction never touches AGI, it never reaches your state return automatically. Your state has to take action to pass the break through, and states fall into three camps:

• Rolling conformity states automatically adopt most federal changes, so the deduction flowed through unless lawmakers voted to block it.
• Static conformity states tie their tax code to the federal code as of a fixed past date. If that date is before July 2025, the tips deduction does not exist in state law until the legislature updates it.
• Selective conformity states (Alabama, Arkansas, Mississippi, New Jersey, and Pennsylvania) pick federal provisions one by one and start from their own tax base, so nothing flows through without a new law. None of them has acted on the tips deduction.

Even some rolling-conformity states said no. Colorado, for example, kept the tips deduction at the state level but actively opted out of the overtime deduction, citing the revenue hit. The District of Columbia briefly decoupled from nearly all the OBBBA individual provisions before revising its budget. The result is a genuine patchwork, and it is still shifting as 2026 legislative sessions wrap up.

The States Where Your Tips Are Not Taxed in 2026

There are three groups of states where you keep your tips free of state income tax:

Group 1: No income tax on wages (9 states)

Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming do not tax wage income, so tips were never taxed and the federal question is moot. Washington taxes capital gains, not wages, and New Hampshire's old interest-and-dividends tax ended in 2025. If you are thinking about a move, compare take-home pay with our Texas paycheck calculator to see the no-income-tax difference in dollars.

Group 2: States that conformed to the federal tips deduction

Michigan deserves a special mention: it was the first state to affirmatively opt into the tips and overtime breaks for 2026, with its treasury estimating the tips break alone costs about $45 million a year in revenue. Indiana enacted its own tips and overtime deductions starting with the 2026 tax year as well.

Group 3: Partial or in motion

• Georgia passed its own smaller version: for 2026 through 2028 you can exclude up to $1,750 of cash tips (plus $1,750 of overtime) on your Georgia return, taxed at the state's 4.99% flat rate for 2026. It is not the full federal $25,000, but it is real money.
• New York is moving in the federal direction. Governor Hochul backed a New York-level no-tax-on-tips plan, and the FY2027 state budget agreement includes eliminating state income tax on tipped wages up to $25,000. Until that becomes law, New York still taxes tips in full, so check your New York take-home pay with the current rules.

Ballotpedia counted 19 conforming states out of the 41 that tax wages as of May 2026, with 21 declining and Georgia partially conforming. Statehouses are still acting, so confirm with your state department of revenue before you file.

The States That Still Tax Your Tips in Full

If your state is not in the groups above, your tips are fully taxable at the state level even after you claim the federal deduction. States that have confirmed they do not recognize the federal tips provision (or whose conformity setup means it does not apply) include California, Illinois, Maine, Massachusetts, Rhode Island, Virginia, Connecticut, Hawaii, New Jersey, Pennsylvania, Alabama, Arkansas, Mississippi, and the District of Columbia.

A few situations deserve a closer look:

• Illinois explicitly decoupled, meaning tipped workers add the deducted tips back on their state return and pay the flat 4.95% on all of it. Run the full breakdown in our Illinois paycheck calculator to see both layers.
• Arizona is the odd one. State tax forms list deductions for tips and overtime based on a governor's executive order, but the legislature never passed the authorizing law, and two bills were vetoed. Tax experts have warned that filers are being instructed to take deductions they may not legally be entitled to.
• South Carolina tried to opt in: the bill passed the House but died in the Senate, and the state extended its filing deadline to October 15 while the legislature debated. For now, tips remain taxable there.

The Dollar Math: What "Still Taxed" Actually Costs You

Meet a hypothetical bartender in Chicago. She earns $28,000 in wages plus $17,000 in reported tips, for $45,000 total, filing single. Her tips are well under the $25,000 federal cap and her income is far below the phaseout, so she deducts the full $17,000 federally. Her marginal federal rate is 12%, so the deduction saves her:

$17,000 x 12% = $2,040 in federal income tax

Now watch what happens at the state level depending on where she lives:

Same job, same tips, same federal savings. The Illinois bartender still hands the state $841.50 on tips the IRS just declared tax-free, while her counterparts in Nevada and Michigan keep all of it. In a high-bracket state like California, the state bite on $17,000 of tips can run well over $1,000. That is the real price of nonconformity, and it repeats every year the deduction is in effect.

Three Things Tipped Workers Should Do Before Filing

1. Report every tip. The deduction only covers reported tips. If your tips from one employer pass $20 in a month, report them to that employer on Form 4070 so they land on your W-2. Unreported cash tips do not qualify, and the IRS finalized its reporting rules in April 2026.

2. Plan for quarterly taxes if tips make up most of your pay. Tip income rarely has enough withheld, and the federal deduction does not change what you owe the state. If you are self-employed or under-withheld, estimate what you owe with our free quarterly tax calculator so April brings a refund, not a surprise.

3. Know the self-employment limits. Gig and delivery drivers in tipped occupations can claim the deduction too, but it is capped at the net income of the business where the tips were earned, and workers in specified service trades (lawyers, doctors, consultants, and similar fields) are excluded entirely. Model your full tax picture with our 1099 tax calculator.

Frequently Asked Questions

Do states tax tips in 2026?

Most do. The nine states with no income tax on wages never tax tips, and about 19 states have conformed to the federal deduction, with Georgia offering a smaller $1,750 state-only version. Everywhere else, tips remain fully taxable at the state level even after you claim the federal deduction.

Does the federal no-tax-on-tips deduction automatically apply to my state return?

No. The deduction is claimed below the AGI line, so it does not flow through to states that start their tax math from federal AGI. Your state must conform to the federal provision or pass its own version. Most have done neither.

Do I still pay Social Security and Medicare tax on tips?

Yes. FICA taxes apply to every dollar of reported tip income: 6.2% Social Security up to the $184,500 wage base for 2026, plus 1.45% Medicare with no cap. The OBBBA deduction covers income tax only.

Do I have to report cash tips to claim the deduction?

Yes. Only reported tips qualify. Report tips to your employer monthly once they exceed $20, and they will appear on your W-2. The IRS finalized its occupation list and reporting rules in April 2026, so clean W-2 reporting is the safest path to the full deduction.

I moved from a high-tax state to Texas. Do I need to update anything?

Texas has no income tax, so your tips become state-tax-free once you are a resident. You may also want to revisit your W-4 withholding, since federal tax is now your only income tax on tips. Recalculate your new take-home with our free paycheck calculator.

Last updated: October 2026 | Sources: IRS final regulations on the qualified tips deduction (April 2026); Ballotpedia News state conformity tracker (May 2026); Associated Press state tax reporting; Tax Foundation; Intuit Tax Pro Center. State conformity is changing as legislatures act; confirm with your state department of revenue before filing.