President Donald Trump’s new federal tax breaks for tips and overtime face a crucial test as most states refuse to adopt the changes, leaving millions of American workers paying state taxes on income now exempt from federal taxation.

Most States Decline Federal Tax Relief

Only six states have adopted the new federal tax deductions signed into law by President Trump in July 2025. Idaho, Iowa, Montana, North Dakota, and Oregon allow workers to claim all three new tax breaks covering tips, overtime pay, and auto loan interest. Colorado permits deductions for tips and auto loans only, while Alabama restricts relief to auto loan deductions. The remaining states with income taxes have declined to match federal policy, requiring workers to pay state taxes on tips and overtime income despite federal exemptions.

Eight states without income taxes avoid this conflict entirely. Workers in states like California, New York, and Texas will see different impacts based on their state’s tax structure. The federal law also includes a $6,000 deduction for older adults earning less than $75,000 annually, though state adoption of this provision varies as well.

Filing Deadline Approaches

The April 15 deadline for 2025 federal and state income tax returns creates urgency for workers navigating the new tax landscape. Service industry employees earning tips and hourly workers receiving overtime pay face complex calculations as they determine federal deductions while accounting for state tax obligations. Financial advisors recommend workers in non-participating states carefully review their tax situations to avoid unexpected liabilities from the split between federal and state treatment of tip and overtime income.

What This Means for American Workers

The federal tax and spending cut bill represents President Trump’s effort to provide financial relief to working Americans, particularly those in service industries and hourly positions. However, the limited state adoption undermines the policy’s effectiveness for millions of taxpayers. Workers in the six participating states gain the full benefit of reduced tax burdens on tips and overtime, while those in other states receive only partial federal relief. The divide highlights ongoing tensions between federal tax policy and state fiscal independence, with individual states prioritizing budget concerns over matching federal tax cuts.