"To tax tips or not? That is a question that will confront lawmakers in states across the U.S. as they convene for work next year. President Donald Trump's administration is urging states to follow its lead by enacting a slew of new tax breaks for individuals and businesses, including deductions for tips and overtime wages, automobile loans and business equipment. 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. 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 updated before people begin filing them. States also could apply the changes to their 2026 taxes, a decision requiring less haste."
Federal tax law creates temporary deductions for tips, overtime, interest on new vehicle loans, and certain business equipment. Some states automatically conform to federal changes while others require legislative action to opt in or out. When states do not conform, taxpayers could avoid federal taxes on tips and overtime yet still owe state tax on those earnings. States that adopt all federal cuts could deliver hundreds of millions in annual savings but face fiscal pressure from higher Medicaid and SNAP costs included in the federal bill. Most states convene sessions in January; retroactive 2025 alignment requires rapid legislative action.
Read at www.twincities.com
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