Excited about no tax on tips? Bonus senior deduction? Not in these states

An emergency bill passed in Washington, DC, axing key tax breaks touted in the One Big Beautiful Bill Act for its residents highlights why Americans should pay attention to state tax laws, experts said.

To address an expected $1 billion revenue loss over the next three years due to lost federal government-related jobs, Washington’s city council passed an emergency tax bill this month decoupling parts of its tax code from recent federal tax changes under President Donald Trump‘s signature tax and spending law. Among the changes, it’s removing local income tax savings tied to the new no tax on tips deduction and the $6,000 bonus senior deduction. That means district residents who qualify for these federal tax breaks won’t be able to claim them on their local tax returns and will end up losing savings.

While most Americans focus on federal tax laws, the Washington move shows why Americans will need to start paying more attention to state tax laws. States aren’t required to conform with all federal tax provisions. With COVID-era federal aid depleted, the economy uncertain, and states on the hunt for money, many states may look to shore up budgets by decoupling from federal tax laws.

“The District of Columbia is not alone in assessing the costs of OBBBA conformity, with lawmakers across the country evaluating the trade-offs associated with adopting or decoupling from key provisions of the reconciliation act,” the Tax Foundation, a nonprofit research organization, wrote.

Effective retroactively to January 1, 2025, the district voted to temporarily suspend multiple provisions in the law, which was signed by Trump on July 4, including:

• Higher basic standard deductions

• Charitable contribution for non-itemizers

• Qualified small business stock exclusion

• No tax on tips

• No tax on overtime pay

• Personal car loan interest deduction

• Bonus $6,000 senior tax deduction

The council’s emergency amendment applies for 90 days, with a planned temporary extension of 225 days. A permanent measure would have to go through the normal, lengthier permanent state legislative process, which would require more discussion and votes.

By eliminating some of the tax provisions, the district may save $95 million in fiscal year 2025, and $567 million through fiscal year 2029, the Tax Foundation said.

Some of the savings will be funneled to accelerate a full local match for the federal Earned Income Tax Credit and establishing a local child tax credit of $1,000 per child for eligible families, the council said.

Still, residents who qualified for those tax breaks would lose out. A qualifying senior who can’t claim the extra $6,000 deduction on a tax return would lose $360 to $390, estimated Richard Pon, a San Francisco-based certified public accountant.

Washington isn’t alone in choosing to decouple from federal tax laws that could benefit individual taxpayers.

Trump‘s mega tax package “is causing havoc on state budgets as many conform to the Internal Revenue Code, and these states are seeing big drops in forecasted revenue,” Pon said.

Other states that have moved to protect their budgets include:

• Colorado: Rejected no tax on overtime pay. It will add a line to its state tax form for “Excess federal deduction for overtime pay.” Taxpayers must report the amount deducted federally and add it back for state purposes.

• New York: Will continue taxing tips and overtime pay by adding new codes for “Add-back of exempt tip income” and “Add-back of exempt overtime pay” on its IT-225 form.

• Illinois: Hasn’t adopted no tax on overtime and tips and will probably update Schedule M to require add-backs for federally exempt tip and overtime income.

• Maine: Rejected the bonus senior deduction and deductions for car loan interest, tips and overtime

“You must pay close attention to state adjustments for the next few years, as each state’s approach differs,” said Eric Clements, director of Tax Compliance at Thomson Reuters. “This complexity makes DIY tax preparation less viable for affected clients.”

Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.

This article originally appeared on USA TODAY: No tax on tips or overtime? Not if you live in these states