🚨 Heads Up! Your State Might Still Tax Your Tips and Overtime

On July 4, 2025, the federal government enacted sweeping tax reforms under the Big Beautiful Bill (BBB)—including headline changes like no federal income tax on cash tips (up to $25,000) and tax-free overtime pay from 2025 through 2028.

But before you start celebrating those tax savings, there's something important you need to know:

Your state might not follow suit.

🏛️ State Tax Laws Don’t Automatically Match Federal Law

Many taxpayers assume that when federal tax laws change, states adjust automatically. In reality, state tax systems operate independently, and they don’t always conform to federal law—especially when it comes to income exclusions and deductions.

There are three main types of state conformity:

1. Rolling Conformity: State automatically adopts federal changes as they happen.

2. Static Conformity: State conforms to the Internal Revenue Code (IRC) as of a specific past date.

3. Selective Conformity: State picks and chooses which federal provisions to follow.

If your state uses static or selective conformity, it may still treat your tips and overtime as taxable, even if the federal government does not.

🎯 Real-Life Examples

Let’s say you’re a server in California or a nurse in New York. Under the new federal law:

• Your cash tips up to $25,000 might be excluded from federal income tax.

• Your overtime pay could be 100% tax-free federally.

But in these states:

• Unless state lawmakers pass matching legislation or update their conformity rules,

• You’ll still pay state income tax on every dollar of those tips and overtime earnings.

Some states—like Pennsylvania, New Jersey, and Iowa—have a long history of decoupling from federal tax law changes, particularly when it involves revenue losses for the state budget.

💡 What You Can Do

Here’s how to navigate this post-BBB tax landscape wisely:

1. Check Your State's Conformity StatusVisit your state’s Department of Revenue or talk to a tax professional to see whether your state adopts the July 4th changes.

2. Plan for a Split Tax PictureJust because your tips and OT are tax-free federally doesn’t mean you won’t owe state taxes on them. Set aside extra if needed.

3. Watch for Legislative ActionSome states may introduce bills to match federal treatment, especially those with rolling conformity. Others may not.

4. Keep Good RecordsIf the IRS requires specific documentation to exclude tips or overtime, your state might require even more detail—especially if the treatments differ.

🧾 Example: Same Income, Two Different Tax Outcomes

	Federal Tax	State Tax (Non-Conforming State)
$10,000 Overtime Pay	$0	~$500–$1,000 (depending on rate)
$20,000 in Cash Tips	$0	~$800–$1,600

That’s a potential $1,500+ in state tax, even if the IRS doesn’t take a dime.

📣 Final Thought

The federal tax break on tips and overtime is a big win for workers, but don't get blindsided by state tax bills. Federal law is not the final word—especially when it comes to income tax.

Always check how your state handles new tax rules. As always, working with a knowledgeable tax strategist can help you stay compliant and maximize every opportunity.

Need help navigating state and federal tax rules? Let’s schedule a discovery call and build a tax strategy that works on all levels.