Key Takeaways
- Several states, along with Washington, D.C., are choosing not to adopt popular tax breaks from the new federal “One Big Beautiful Bill Act.”
- The primary reason for “decoupling” from the federal tax code is to prevent significant state revenue losses.
- Residents in these areas will not be able to claim deductions like no tax on tips, no tax on overtime, and a bonus senior deduction on their state tax returns.
- This divergence between federal and state tax laws will likely make tax filing more complex for affected individuals.
A new federal law promised exciting tax breaks, including no tax on tips and overtime pay, but residents in several states may not see those savings on their local returns. Facing potential budget shortfalls, states are beginning to “decouple” from the federal tax code, creating a more complex financial landscape for taxpayers.
Why States Are Opting Out
The “One Big Beautiful Bill Act,” signed into law by President Donald Trump, introduced several widely-popular tax deductions. However, since many state tax systems are linked to the federal code, automatically adopting these changes could lead to a massive drop in state revenue.
With COVID-era federal aid gone and the economic outlook uncertain, many states are moving to protect their finances. According to the Tax Foundation, a nonprofit research organization, lawmakers across the country are weighing the costs of conforming to the new federal law versus decoupling from its key provisions.
Washington, D.C. Suspends Key Breaks
Washington, D.C., is a prime example. Facing a projected $1 billion revenue loss, the city council passed an emergency bill to temporarily suspend multiple federal tax breaks for its residents.
Effective retroactively to January 1, 2025, D.C. will not recognize the following federal deductions on local returns:
- No tax on tips
- No tax on overtime pay
- Bonus $6,000 senior tax deduction
- Higher basic standard deductions
- Charitable contributions for non-itemizers
By making this move, the district expects to save an estimated $95 million in fiscal year 2025 alone.
Which Other States Are Decoupling?
Washington, D.C., is not acting in isolation. Several other states have already taken steps to reject specific federal tax provisions:
- Colorado: Has rejected the provision for no tax on overtime pay. State tax forms will require taxpayers to add back any overtime income that was deducted federally.
- New York: Will continue to tax both tips and overtime pay, requiring add-backs on its state tax forms.
- Illinois: Is expected to require add-backs for federally exempt tip and overtime income.
- Maine: Has rejected the bonus senior deduction as well as deductions for car loan interest, tips, and overtime.
What This Means for Your Taxes
For residents in these states, tax season is about to get more complicated. “You must pay close attention to state adjustments for the next few years, as each state’s approach differs,” warned Eric Clements, Director of Tax Compliance at Thomson Reuters.
Taxpayers will need to identify which federal deductions are not recognized by their state and add that income back on their state returns. This added complexity may make do-it-yourself tax preparation more challenging for those affected.
Image Referance: https://www.usatoday.com/story/money/personalfinance/2025/11/16/tax-tips-overtime-senior-deductions-states/87256825007/