Which States Tax Tips Under OBBBA? (w/Examples) + FAQs

This article reflects federal rules and state rules as of June 2026 and covers tax year 2025 (the return you file in 2026). Tax law changes fast, and many states are still deciding — confirm current figures with your state tax agency before you file.

Quick Answer

21 states still tax your tips in tax year 2025 even though the federal “No Tax on Tips” deduction lets you deduct up to $25,000. Nine states have no income tax at all, so tips are tax-free there. The remaining states conform and let you skip state tax on qualifying tips too.

Right now, your federal return and your state return may treat the same tip income in opposite ways. The new No Tax on Tips deduction is a federal break created by the One Big Beautiful Bill Act (OBBBA), which President Trump signed on July 4, 2025. It lowers your federal taxable income, but it does not automatically change what you owe your state.

That gap matters because of how many people it touches and how much money is on the line. The IRS estimates about 6 million workers report tipped wages, and the House Ways and Means Committee says the deduction will cut taxes by an average of $1,300 per tipped worker. But in a non-conforming state, a server can claim that federal break and still owe full state tax on every dollar of tips.

Here is what you will learn:

🗺️ Exactly which states tax tips, which exempt them, and which have no income tax at all for tax year 2025.
💵 A full worked example showing the federal dollars you save versus the state dollars you may still owe.
🧾 How to claim the deduction, which forms feed it, and what records to keep so you do not lose it.
⏳ The effective and sunset dates, the $25,000 cap, and the income phase-out that can shrink your deduction.
⚠️ The seven mistakes that cost tipped workers real money — and the simple fixes for each one.

What “No Tax on Tips” Actually Is

The No Tax on Tips deduction is a federal “above-the-line” deduction created by Section 70201 of the OBBBA. Above-the-line means you can claim it whether you take the standard deduction or itemize, so most tipped workers qualify. It does not erase tax on your whole paycheck — it only removes qualifying tip income from your federal taxable income.

The deduction lets eligible workers subtract up to $25,000 in qualified tips per year from federal taxable income, and it covers tax years 2025 through 2028. The consequence of the sunset date is direct: unless Congress extends it, the break disappears after the 2028 tax year, so plan your tax strategy around a deduction that is temporary, not permanent.

A common misconception is that “no tax on tips” means no tax at all on tips. It does not. The deduction only touches federal income tax. Your tips are still subject to Social Security and Medicare (payroll) taxes, and in many states they are still hit by state income tax. What you should do about it: treat this as a federal income-tax break only, and check your state rules separately before you assume your tips are tax-free.

What Counts as a Qualified Tip

A qualified tip must be voluntary and set by the customer. Automatic gratuities and mandatory service charges — like the 18% a restaurant adds for a party of eight — do not count, because the customer did not choose the amount. The consequence of getting this wrong is real: if you deduct a mandatory service charge as a tip, the IRS can deny the deduction and assess back tax plus interest.

“Cash tips” is defined broadly. It includes tips paid by credit card, mobile app, gift card, and cash-equivalent tokens such as casino chips, not just paper money. A bartender who is tipped through a payment app still has qualified tips. What to do: keep your own running tip log so you can prove the amount, especially for app and card tips.

Which Workers Qualify

You must work in an occupation the IRS says customarily and regularly received tips on or before December 31, 2024. In April 2026 the IRS finalized regulations creating a Treasury Tipped Occupation Code system covering more than 70 occupations across eight categories, including food and beverage service, hospitality, personal care, and transportation. If your job is not on that list, you cannot claim the deduction, and claiming it anyway invites an IRS adjustment. What to do: confirm your occupation appears on the IRS list before you file.

The $25,000 Cap and the Income Phase-Out

Two limits shape how much you actually get. The first is the hard $25,000 cap on qualified tips for tax year 2025. Even a high-earning bartender who collects $40,000 in tips can only deduct $25,000 federally.

The second is the income phase-out. The deduction shrinks by $100 for every $1,000 of modified adjusted gross income (MAGI) above $150,000 for single filers and $300,000 for joint filers. MAGI is your adjusted gross income with a few items added back; for most tipped workers it is close to total income. The consequence: a single filer with $200,000 MAGI loses $5,000 of the deduction ($50,000 over the threshold ÷ $1,000 × $100). What to do: estimate your MAGI before counting on the full $25,000.

A frequent misconception is that married-filing-separately couples get the same deal. They often face tighter limits on OBBBA deductions, so if you file separately, verify your eligibility before claiming. The next step is simple — run your numbers against both the cap and the phase-out, then claim the smaller result.

The Heart of the Matter: Federal vs. State

This is where most tipped workers get surprised. The federal government created the deduction, but each state decides on its own whether to follow it. The federal rule is the baseline; your state law is an overlay that can match it, ignore it, or partly adopt it.

Of the 41 states that levy a broad individual income tax on wages, 19 conformed their codes to adopt the No Tax on Tips deduction, 21 declined, and Georgia partially conformed, according to Ballotpedia’s May 2026 tracking. The other nine states have no broad income tax at all. Because some states are still mid-legislation in 2026, treat any “pending” status as unsettled and confirm before filing.

The reason outcomes differ comes down to conformity method, explained plainly below. The consequence of your state’s choice is dollars: in a non-conforming state, your federal deduction does nothing for your state bill. In states that don’t conform, workers who get the federal deduction still owe state tax on those tips. What to do: find your state in the tables below and plan for the version that applies to you.

How State Conformity Works

States plug into the federal tax code in one of three ways, per Ballotpedia. Rolling conformity states automatically adopt most federal changes as they pass, so the deduction flows through without new legislation. Static conformity states tie their code to the federal code as of a fixed date and must update that date to pick up a new provision. Selective conformity states adopt federal provisions one by one and must pass a specific law to extend any change.

The method does not always decide the result. Some rolling-conformity states passed laws to decouple from the tip deduction, and some static states passed laws to adopt it. The consequence is that you cannot guess from the label alone — a rolling state can still tax your tips. What to do: check your specific state’s latest action, not just its general conformity style.

Which Situation Applies to You?

Your answer depends entirely on where you live and work. Use these branches to jump to your case.

You live in a no-income-tax state (such as Texas or Florida): your tips face no state income tax at all, and the federal deduction is a clean bonus. Read the “No Income Tax States” section.
You live in a conforming state (such as Idaho or many rolling-conformity states): you get the break on both returns. Read the “Conforming States” section.
You live in a decoupled or non-conforming state (such as New York, New Jersey, or DC): you still owe full state tax on tips. Read the “States That Still Tax Tips” section and run the worked example.
You live in a “decision pending” state: your outcome is not final for 2025 yet. Read the “Pending States” note and confirm with your state agency before filing.

States With No Income Tax (Tips Are State-Tax-Free)

Nine states do not impose a broad personal income tax, so tips are never taxed at the state level there. These states are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Note that Washington taxes certain capital gains, but that does not touch wage or tip income.

In these states, conformity is a non-issue — there is no state income tax to conform. The consequence is the best-case outcome: you claim the federal deduction, and your tips already escape state income tax entirely. What to do: still claim the federal deduction correctly, because the federal break is the only one in play and it is worth real money.

No-Income-Tax State	What Happens to Your Tips
Texas, Florida, Nevada	No state income tax on tips; federal deduction applies in full
Washington, Wyoming, South Dakota	No wage/tip income tax; federal deduction is your only break
Alaska, Tennessee, New Hampshire	No broad income tax on tips for tax year 2025

Conforming States (Tips Get the Break Twice)

A majority of income-tax states conform to the deduction, meaning your qualified tips come off both your federal and your state taxable income. Per Ballotpedia, 19 of the 41 income-tax states had conformed by May 2026, and many of these are rolling-conformity states that adopted the change automatically.

The consequence here is the friendliest: a server in a conforming state deducts the same qualified tips from state income too, lowering both bills. A common misconception is that conformity is permanent — but a state legislature can decouple later, and the federal deduction itself sunsets after 2028. What to do: claim the deduction on your state return using your state’s tip subtraction line or worksheet, and recheck conformity each filing year.

States That Still Tax Tips (Decoupled or Non-Conforming)

This is the group that costs tipped workers the most. 21 income-tax states declined to adopt the deduction as of May 2026, so workers there still owe state income tax on tips even after claiming the federal break. Among the clearest examples, New Jersey’s individual income tax does not follow the federal OBBBA deductions for tips, so tips stay fully taxable on a New Jersey return.

New Jersey is a strong example because its income tax has always run on its own definitions, largely separate from federal taxable income. The consequence: a Newark bartender claims the federal deduction, sees federal tax drop, then files a New Jersey return where every tip dollar is still taxed. What to do in a non-conforming state: do not assume your state refund will rise with your federal one, and budget for the full state tax on tips. The worked example below shows exactly how this plays out.

Your State Type	What You Owe on $20,000 of Tips
Conforming state	$0 federal income tax on tips (up to cap); $0 state income tax on tips
Decoupled state (e.g., New Jersey)	$0 federal income tax on tips (up to cap); full state income tax still due
No-income-tax state (e.g., Texas)	$0 federal income tax on tips; no state income tax exists

Pending States (Not Final for 2025 Yet)

Some static-conformity states had not yet decided whether to adopt the deduction for tax year 2025 as of early 2026. These states must pass legislation to update their conformity date, and decisions were expected around the April 15, 2026 filing deadline. Georgia partially conformed, which shows how messy the middle ground can be.

The consequence of a pending status is uncertainty: if you file early and your state later adopts the deduction, you may need an amended return to claim it; if it declines, you may owe more than you expected. What to do: if your state is pending, either wait for the final decision or file and be ready to amend, and watch your state revenue department’s guidance closely.

A Full Worked Example (Real Dollars)

Let me show the math two ways so you can copy it. Assume Maria, a single restaurant server, earns $30,000 in regular wages and $20,000 in qualified tips in tax year 2025, for $50,000 total income. Her tips are well under the $25,000 cap, and her income is far below the $150,000 phase-out, so she can deduct the full $20,000 federally.

Federal side (everyone): Maria deducts $20,000 of tips from her federal taxable income. If her marginal federal rate is 12%, that saves her about $2,400 in federal income tax ($20,000 × 12%). She still pays Social Security and Medicare on the tips, because the deduction does not touch payroll taxes.

State side, version A — Maria lives in Texas: Texas has no income tax, so she owes $0 in state income tax on the tips. Her total benefit is the full $2,400 federal savings, and nothing is clawed back at the state level.

State side, version B — Maria lives in a decoupled state with a 5% flat income tax: Her state ignores the federal deduction, so all $20,000 of tips stay in her state taxable income. She owes about $1,000 in state income tax on those tips ($20,000 × 5%). Her net benefit shrinks from $2,400 to roughly $1,400 once the state takes its cut — a $1,000 difference driven entirely by where she lives.

Named Examples

James, a Houston bartender (Texas). James collects $22,000 in qualified tips in 2025. He deducts the full amount federally and, because Texas has no state income tax, owes nothing to the state. His result is the cleanest possible outcome — full federal break, zero state tax.

Aisha, a Newark hairstylist (New Jersey). Aisha earns $18,000 in tips. She claims the federal deduction and lowers her federal bill, but because New Jersey does not follow the OBBBA tip deduction, every dollar of her tips is still taxed on her New Jersey return. Her lesson: the federal win did not lower her state bill at all.

Carlos, a high-earning casino dealer (single, conforming state). Carlos has $200,000 MAGI and $25,000 in tips. His phase-out reduces his deduction by $5,000 ($50,000 over the $150,000 threshold ÷ $1,000 × $100), leaving a $20,000 federal deduction. Because his state conforms, he gets that same $20,000 subtraction on his state return too.

Mistakes to Avoid

Assuming “no tax on tips” means no tax at all. It only covers federal income tax; you still owe payroll taxes and, in 21 states, state income tax.
Counting mandatory service charges as tips. Auto-gratuities do not qualify, and deducting them can trigger an IRS adjustment with back tax and interest.
Ignoring your state’s rules. In a decoupled state, claiming the federal break and expecting a state break leaves you under-withheld and facing a state balance due.
Forgetting the $25,000 cap. Tips above $25,000 are not deductible in 2025, so deducting more invites a correction.
Overlooking the phase-out. High earners who claim the full deduction without reducing it for income over $150,000/$300,000 will owe the difference.
Not keeping a tip log. Without records for app, card, and cash tips, you cannot prove your qualified tip amount if the IRS asks.
Filing early in a pending state. If your state decides after you file, you may have to amend your return to fix the tip treatment.

Do’s and Don’ts

Do confirm your occupation is on the IRS tipped-occupation list, because off-list jobs cannot claim the deduction.
Do keep a daily tip log, since substantiated records protect your deduction the way the self-employed travel guide example shows.
Do check your state’s conformity before filing, because the federal and state answers can differ.
Do plan for payroll taxes, as Social Security and Medicare still apply to every tip dollar.
Do recheck the rules each year, since the deduction sunsets after tax year 2028.
Don’t treat auto-gratuities as tips, because mandatory charges are disqualified.
Don’t assume conformity is permanent, as states can decouple and the federal break is temporary.
Don’t ignore the phase-out if your MAGI is high, or you will over-claim.
Don’t skip the deduction if you qualify, since most tipped workers can claim it even without itemizing.
Don’t guess your state status from its conformity label, because some rolling states decoupled and some static states adopted.

Pros and Cons of the Deduction

Pro: real federal savings, averaging about $1,300 per tipped worker, which directly lowers take-home tax.
Pro: available to non-itemizers, so you keep the standard deduction and still benefit.
Pro: broad definition of tips, covering card, app, and cash-equivalent tips, not just paper money.
Pro: covers many occupations, with more than 70 tipped jobs recognized by the IRS.
Pro: stacks with conforming states, doubling the benefit where the state follows federal law.
Con: it is temporary, sunsetting after tax year 2028 unless Congress extends it.
Con: payroll taxes still apply, so it is not a full tax break on tips.
Con: 21 states still tax tips, leaving many workers with a state bill anyway.
Con: phase-out and cap limit it, shrinking the benefit for high earners.
Con: federal cost is high, about $30 billion per year per the Cato Institute, which fuels debate over whether it survives.

How to Claim It (Forms and Steps)

The IRS issued guidance in Notice 2025-69 explaining how to figure your deduction even though Form W-2 and Form 1099 were not changed for tax year 2025. For employees, your W-2 box 7 (Social Security tips) is the main starting number. A server whose W-2 box 7 shows $18,000 of tips may use that $18,000 as her qualified tips, per the IRS’s own example.

If you reported extra tips, Form 4137 (for unreported tip income) feeds the calculation too. The IRS example of a bartender shows he may combine $4,000 of unreported tips from Form 4137, line 4 with his W-2 tips. Self-employed tipped workers use their own logs to substantiate tips that a 1099-K does not break out separately. For step-by-step help on the underlying form, see a guide on how to fill out Form 4137 and a walkthrough of Form 1040 tip reporting.

What to Do Next

Confirm eligibility. Check that your occupation is on the IRS tipped-occupation list and that your tips are voluntary, not mandatory charges.
Pull your numbers. Gather your W-2 box 7, any Form 4137 amounts, and your own tip log; compare them to the $25,000 cap.
Check the phase-out. Estimate your MAGI and reduce the deduction if you are over $150,000 single or $300,000 joint.
Look up your state. Confirm whether your state conforms, decoupled, has no income tax, or is still pending for tax year 2025.
File correctly, then watch deadlines. The federal and most state returns are due April 15, 2026; if your state is pending, be ready to amend.
Call a pro if it is complex. If you are self-employed, file married-filing-separately, have high income near the phase-out, or live in a pending state, a CPA or tax attorney can confirm your numbers — usually for a few hundred dollars, far less than a wrong return can cost.

This article is educational and is not a substitute for advice from a licensed tax professional about your specific situation.

FAQs

Do all states tax tips under OBBBA? No. For tax year 2025, 21 income-tax states still tax tips, 19 conform and exempt them, Georgia partly conforms, and 9 states have no income tax at all.

How much can I deduct for tips in 2025? Up to $25,000 in qualified tips per year for tax years 2025 through 2028, reduced by the income phase-out above $150,000 single or $300,000 joint MAGI.

Does Texas tax tips? No. Texas has no state income tax, so your tips face no state income tax, and you still claim the full federal deduction on your federal return.

Does New Jersey tax tips? Yes. New Jersey does not follow the federal OBBBA tip deduction, so tips remain fully taxable on your New Jersey income tax return for tax year 2025.

Are tips still subject to Social Security and Medicare? Yes. The deduction only reduces federal income tax. Your tips still owe Social Security and Medicare (payroll) taxes regardless of your state.

Do automatic gratuities qualify for the deduction? No. Mandatory service charges and auto-gratuities are not voluntary, so they do not count as qualified tips and cannot be deducted.

When does the No Tax on Tips deduction expire? After tax year 2028. It covers 2025 through 2028 and disappears unless Congress acts to extend it before then.

Do I have to itemize to claim it? No. It is an above-the-line deduction, so you can claim it while still taking the standard deduction on your federal return.

What if my state hasn’t decided yet? Your status is pending. Some static-conformity states had not adopted the deduction as of early 2026; wait for final guidance or be ready to amend your state return.

How do I prove my tip amount? Use your records. Start with W-2 box 7, add Form 4137 amounts, and keep a daily tip log for app, card, and cash tips in case the IRS asks.

Does the deduction lower my state refund automatically? No. In non-conforming states, the federal deduction does not change your state taxable income, so your state bill and refund are unaffected.

Are credit card and app tips eligible? Yes. Cash tips are defined broadly to include credit card, mobile app, gift card, and cash-equivalent tips such as casino chips.

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