States are divided on whether to follow Trump's tax breaks on tips, overtime, and more

"In some states, the new federal tax breaks will automatically apply to state income taxes unless legislatures opt out. But in many other states, where tax laws are written differently, the new tax breaks won't appear on state tax forms unless legislatures opt in. In states that don't conform to the federal tax changes, workers who receive tips or overtime - for example - will pay no federal tax on those earnings but could still owe state taxes on them."

"States that embrace all of Trump's tax cuts could provide hundreds of millions of dollars of annual savings to certain residents and businesses. But that could financially strain states, which are being hit with higher costs because of new Medicaid and SNAP food aid requirements that also are included in the big bill Trump signed. So far, only a few states have taken votes on whether to adopt the tax breaks."

"Most states begin their annual legislative sessions in January. To retroactively change tax breaks for 2025, lawmakers would need to act quickly so tax forms could be updated before people begin filing them. States also could apply the changes to their 2026 taxes, a decision requiring less haste. A bill Trump signed on July 4 contains about $4.5 trillion of federal tax cuts over 10 years. It creates temporary tax deductions for tips, overtime, and loan interest on new vehicles assembled in the U.S."

Federal legislation creates temporary tax deductions for tips, overtime, automobile loan interest on new U.S.-assembled vehicles, and increases deductions for older adults and the SALT cap. Some states automatically conform to federal tax changes unless they opt out, while other states require explicit legislative opt-in, creating mismatches where income may be exempt federally but taxable at the state level. Adopting all federal cuts could save residents and businesses hundreds of millions annually but could strain state finances because of higher Medicaid and SNAP costs included in the bill. Most states begin sessions in January, requiring quick legislative action to make changes retroactive for 2025.

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