The federal deductions for up to $25,000 in tipped income, for a similar amount of overtime pay, and for some auto loan payments have not been widely adopted by states. As of late June, only 10 states – a quarter of the states with personal income taxes — have decided to allow the tipped income deduction for tax year 2026, and just nine are allowing the deduction for overtime. Even in states that adopt these rules, many workers who receive these types of income will not benefit from the tax breaks, because their overall incomes are too low to have any income tax liability against which to claim the deductions.
