Why These States Are Still Taxing Your Tips and Overtime
WASHINGTON — President Trump’s One Big Beautiful Bill promised Americans bigger paychecks by eliminating federal taxes on tips, overtime pay, and other income – but many Democrat-run states have chosen to keep collecting anyway. The refusal of blue states to follow the federal government’s lead has resulted in a patchwork of tax laws across the country that has left waitresses, bartenders, retirees, and hourly workers with very different bills depending on their ZIP code. The Post analyzed state tax laws to determine where Americans have struggled the most to reap the full benefit of President Trump’s signature legislative victory.President Trump signed the One Big Beautiful Bill Act into law during a July 4 celebration at the White House last year. Getty ImagesThe biggest offenders are Connecticut, Minnesota, New Mexico, Rhode Island, and Vermont. Those states tax every major source of income covered by the law, which Trump signed on July 4, 2025.The quintet not only impose some of the highest state tax burdens on income Congress worked to make tax-free but also refuse to participate in the Education Freedom Tax Credit program created by the landmark legislation.Other states, such as New York, have taken a more gradual approach, adopting some of the federal tax breaks while rejecting others.Tax on tipsAs of this month, 31 states and Washington, DC, still tax tips. Workers in states that chose to decouple from the deduction could be losing up to 10% of their tips due to state-level taxes. Minnesota — a state that levies a “progressive individual income tax” — enforces taxes ranging from 5.35% to 9.85%.If a Minnesota server makes $70,000 a year — $25,000 of that coming from tips — they are subject to a 6.8% individual tax rate. The server loses an estimated $1,700 of their tips, due to the state declining to conform to the federal tax break. AP Photo/Ted ShaffreyMeanwhile, New Mexico continues to tax tips despite raking in revenue from the oil and gas industry, the state’s restaurant association fumed. “Continuing to tax tips is out of step with the needs of service workers, and underscores a broader opportunity for the state to reconsider income tax relief for all working residents,” the New Mexico Restaurant Association said. “Under Democrat leadership, New Mexico is one of the most poorly managed states in the country, with one of the worst taxpayer returns on investment in the nation, all while state spending and taxes continue to rise,” said Republican Party of New Mexico interim chairman Mike Nelson, adding that the party has “made it more difficult for those who need [the tax breaks] most.” REUTERSIn states that did conform with the federal standard, like Idaho, service workers who make an average of $25,000 in tips each year are seeing an extra $1,325 in their pocket.Tax on Social Security benefitsTrump’s bill expanded tax relief for many older Americans via a temporary deduction of $6,000 that Americans 65 and older can claim through the 2028 tax year.But not all states have done the same. So Getty ImagesEight states still fully tax Social Security benefits: Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont.“For seniors living on fixed incomes, every dollar matters,” a spokesperson for the nonpartisan Senior Citizen League told The Post. “Many are dealing with higher costs for living, healthcare, groceries, and other everyday expenses. “When some states don’t adopt the same tax relief that’s available at the federal level, it can leave retirees with a higher tax bill simply because of where they live,” the rep added.“Giving seniors the same tax relief at the state level would help them keep more of the income they’ve worked their entire lives to earn and make it a little easier to keep up with the rising cost of living.”In Vermont, the Social Security income tax exemption applies only to individuals earning under $55,000 a year, or couples making under $70,000. In contrast, the federal law starts to phase out the deduction for individuals making $75,000 per year. Tax on overtimeTrump’s law also eliminated federal income taxes on qualifying overtime pay, but 30 states and DC still impose state-level taxes on overtime pay.Under the provision, an individual can deduct up to $12,500 of qualified overtime pay from federal taxes. In states that have conformed, like Michigan, individuals can deduct the same amount from their state tax bill through 2028.Labor groups have also argued that the federal tax deduction should recognize the Fair Labor Standards Act’s overtime rules for certain transportation workers, who in some cases are not eligible for overtime pay unless they work more than 55 hours in a week, rather than the standard 40 hours Aaron Schwartz – Pool via CNP/Shutterstock“Every tax season, hardworking Americans employed in certain industries, including transportation, are forced to sacrifice portions of their overtime pay towards state and federal taxes,” said Transportation Trades Department President Greg Regan, who runs America’s largest transportation labor federation. “Simply put, that’s not fair.”“For many hourly workers, this tax relief could total up to thousands of dollars staying in their pockets.”Education Freedom Tax CreditThe Big, Beautiful Bill created a federal tax credit aimed at expanding school choice through scholarship organizations – but states need to opt in. So far, 29 states have done so.The program allows a taxpayer to contribute up to $1,700 to a qualified scholarship-granting organization and receive a full refund. Donors from a state that opts out of the program can still contribute, but the money would go to benefit students in other states.“It’s really a shame of how it’s going to impact the students in the state that don’t opt in, because you’re going to have contributions from individuals that could otherwise help the kids in your state going elsewhere,” said Matt Frendewey, vice president of strategy at Yes. Every Kid., an advocacy group focused on US education policy.Tommy Schultz, CEO of the American Federation for Children, a school-choice advocacy organization, agreed that the program is a “no-brainer,” and that “governors who remain on the sidelines should listen to their constituents and opt in.”
